High And Higher.

Well stocks did it again. Stocks in general were up on the day and chip shares sent the S&P 500 and the Nasdaq Composite to new highs. Texas Instruments put a positive spin on the market with a strong earnings result and UPS provided a bullish profit guidance. UPS was up 8.7%. For worriers like myself looking at falling shipping rates and slowing logistics this was welcome news indeed and demonstrates the resilience in the U.S. economy.

Boeing posted an unexpected quarterly loss highlighting the damage the 737 Max Jet is doing. Boeing was down 3.1%. Caterpillar was sold on the day down 4.5% on weak sales into China. Positive earnings are driving the stock indices higher. However, there is note of caution as the car manufacturers and manufacturers in general are cautioning investors about a weaker outlook.

The outlook for earnings is a driving force for the positive stock market. Earnings the June Quarter are expected to fall by only 0.1%, the earlier expectation had been 1%. The S&P 500 is now up 20% whilst the NASDAQ is up 25%. Volume on the day was solid and 6.2 bio shares were exchanged. The 20-day moving average is 6.3 bio shares a day.

Treasuries joined the party and rallied alongside their European counterparts. Disappointing manufacturing data out of Europe raised concerns about growth and in particular global growth. German PMI fell to 51.4, analysts had been forecasting 52.3. The ECB meets Thursday and traders are pricing in a 50% chance of a 10-basis point cut.

It is worth noting that the underlying trend in the PMI data is weak. For Europe the PMI is now down a consecutive six months. What is interesting is that as the PMI data is slowing, equity prices are rising. That situation cannot last for any long-term period. If growth continues to stall, then an adjustment in prices should be expected at some point.

For the Treasury traders the rally in European bonds as a result of weak economic conditions provides a signal that the Fed will be looking to be accommodating at the next FOMC meeting.

Weak demand for treasuries continues. The five-year auction saw weak demand and that weak trend has continued from the last auction. Bid to cover was 2.26 times.

The Rant.

One wonders what has happened to the bond vigilantes in this time of unusually low interest rates and increasing budget deficits. It would seem the bond vigilantes have become a mob of patsies unwilling to push the government towards any form of fiscal responsibility.

When Trump reached his agreement with the Congressional leaders to extend the government’s debt limit and raise spending hardly a word was uttered. The treasury market shrugged its shoulders and did little in response to a deal that would boost spending by $1.7 trillion over the decade.

There is no fiscal restraint within the Trump Administration, yet we hear nothing from the fiscal hawks, we hear nothing from the likes of the Tea Party, and we hear nothing from Wall Street. Remembering of course these voices were far from silent when President Obama was in office and all were expressing deep concerns for the state of the budget and the size of the borrowing task.

The markets are letting Washington do as it pleases. The deficit is up 23% this year and the deficit is likely to exceed $1 trillion in the fiscal year commencing in October. Federal debt held by the public stands at 77% of GDP and is rising. The world is awash with cash as a result of Central Banks’ easing and loose monetary policy. There is about $13 trillion of negative debt. Japan has kept its economy going despite its liabilities approaching 240% of GDP.

One day all this may come back to haunt the central banks and the more profligate spenders.  For the moment though no one is putting their hand up to intimidate the likes of Washington.

Market Recap.

Equities: The S&P 500 rose 0.47% The Dow fell 0.29%. The Vix closed at 12.07. The Stoxx Europe 600 Index was unchanged.

Currencies: The pound rose 0.3%. The Bloomberg Dollar Spot Index fell 0.1%. The euro fell 0.1%.

Bonds: (as at 4.30pm). The ten-year is trading at 2.05%. The 2-year is trading at 1.822% and the 30-year is at 2.578%. The U.S. curve closed on the day with the following closes 2/10 at 22.3 bp, 2/30 at 75.3 bp and the 10/30 closed at 52.7 bp. The U.S. 5-year closed at 1.815%. The 2/5 spread is now -1 bp. The ten-year bund closed at -0.42% and the British gilt closed at 0.678%. The 10-year yen gilt is trading -0.149%.

Commodities: Light crude fell 1.52%. Comex copper spot rose 0.35%. Gold rose 0.6%.

Bitcoin is trading around $9,679.

Aussie Market Today.
Stocks to rally on the day. Offshore saw some solid gains and this trend looks likely to continue for a few days at least.

Bonds rallied offshore to the tune of weak growth in Europe. Bonds domestically look likely to rally again but maybe by only a point or two. At some stage I expect the bonds will start to set up for the FOMC meeting next week and that probably means squaring of positions. The treasury and equity markets in the U.S. are looking for a 50 bp rate cut and a 25 bp rate cut will be met it appears with some derision. All will be revealed next week.

The bid tone in credit continues. New issues are being met with very solid demand with bid cover ratios often well in excess of 3 times. Credit has been drifting tighter in general. The bank sub debt paper after widening has started to drift a little tighter. Some issuers more so than others. Despite the large amount of issuance of sub-debt and T1 required by the Australian Banks demand should remain solid as the Australian banks are in a sound position and in an economy that is growing albeit slowly. The spread blowout may turn out to be a storm in a teacup especially so if the equity run continues and central banks keep easing.  Demand for high quality banks at wide spreads should be strong as the securities will look very appealing.

Geopolitical risks remain high and still need to be monitored.