What a day for equities. In one sentence Powell unleashed the bull in equities and the market found itself. No longer are analysts fearful of using the wrong discount rate, because today they know the discount rate is not going to change for a while. Suddenly a lot of valuations look solid and with an anticipated $900 bio or so of buybacks anticipated.
It does not matter what the fourth quarter results look like nor for the next few months, stocks look like a buy and that’s what stocks did. In fact, it was a ‘who cares about trade’ day as stocks enjoyed a rare day where the market saw solid gains.
The outlook for the Fed or at least the outlook that was communicated was one of patience. And for bond investors for the moment it all looks rather benign. Foreign investors can now more easily hedge their investments without being smashed by the swap and that in turn will help fund the ever-growing deficit.
The silver lining may, however, last for a while. To date, we have seen corporates investing in financial assets rather than real assets as a result of QE. However, QT poses different challenges and for as long as rates remain low those zombie companies that could just borrow to stay solvent, they will survive. This misallocation of capital also explains the sluggish productivity growth. This misallocation can continue for some time until lenders (bond investors) start to demand a reward for risk and the borrowers have to roll. Then the fun begins.
And in some way, the U.S. is on the same journey. Treasury refunding sales is now reported to hit a record $84 bio a quarter and rising at a time when Trump has boasted earlier that the tax cuts will pay for themselves and providing in turn opportunities to criticise the Republicans for their fiscal management.
Others, as suggested by former Starbucks CEO Howard Schultz, would call it “reckless failure of their constitutional responsibility”. New issuance will exceed $1 tr for a second year. Tax receipts fell to $205 bio in the fiscal year ending September 30 and this was a 31% fall from the previous period. This decrease in magnitude is unusual during a growth phase.
In the Eurozone, bonds enjoyed a very good month proving that life without the ECB may not be so bad. French bonds rallied 10bp, the biggest in eight months, whilst Spanish bonds rallied 16bp for the month. The outlook in some ways looks positive. After all, growth has peaked, inflation is dormant and central banks are wavering and possibly considering cutting. The Eurozone market looks especially inviting for Asian investors. For U.S. investors, the cross currency hedging is providing investors with a 3% benefit.
Equities: The S&P 500 rose1.69%, the Dow rose 1.49% while the Vix closed at 17.64. The Stoxx rose 0.4%. Trade war fears evaporated on the release of Powell’s comments. Tomorrow may be different but today, enjoy the rally.
Currencies: The Bloomberg Dollar Index fell 0.4%, and the euro rose 0.4% and the pound rose 0.3%.
Bonds: (as at 4.30pm). The ten-year is trading at 2.681%. The 2-year is trading at 2.512% and the 30-year is at 3.036%. The ten-year bund closed at 0.13% and the OAT closed at 0.596%.
The U.S. curve closed on the day with the following closes 2/10 at 16.9bp, 2/30 at 52.6 bp and the 10/30 closed at 35.5bp. The U.S. 5-year closed at 2.488%. The 10-year yen gilt is trading 0.005%. The 2/5 spread is now -2.50 bp.
Commodities: WTI rose 1.8%. Gold rose 0.5%, and copper rose 2.2% (Nymex Feb 19 contract).
Bitcoin is trading around $3,430.
Aussie Market Today.
The solid gains in the U.S. and elsewhere should drive stocks higher. Commodities were stronger. However, a weakening dollar could encourage higher prices and drive demand. All good for the ASX.
Bonds to be stronger on the day. The U.S. Treasuries continue to rally and that’s the trend. Expect a small improvement.
The Aussie is stronger on the day due to better commodity prices and a weaker king dollar.
The direction for markets continues to be strongly influenced by Asia. Look north for some guidance.