The Pressure Cooker.

Temperatures are rising, in more ways than one, and so too the pressure. Sears’ pending bankruptcy appears to have drawn a sympathetic note from Trump whilst the Saudis are now trying to say that Khashoggi’s death was at the hands of rogue operatives who were a tad enthusiastic when interrogating the journalist. What this now means for the Saudis is hard to say but the recalcitrant tantrum over the weekend would not have been missed by its key allies. The temperature is rising and rising quickly. Safe havens are not working as they should.

In the more mundane world of stocks and bonds, the temperature is also rising and that’s more to do with how to contain the losses.  Hedge funds are apparently starting to exit their momentum trades and that means selling pressure will continue. It’s a bit like a pressure cooker.

Tech led the way again and it was down. Trump did help the slide by suggesting more tariffs against China over the weekend as he doubles down on Chinese meddling in the U.S. election. The market talk is about trade tensions, the state of the U.S. economy and how the corporates are faring this reporting cycle. Anything that hints of a slowing could impact the Fed’s desire to hike rates.

The outlook is currently being tempered slightly by weaker than expected domestic retail sales and rising borrowing costs. The next set of data for both payrolls and inflation will be important. In addition, traders are weighing up just how many bonds they want. A ballooning deficit will be a catalyst for higher bond yields and appetite is waning.

The deficit in the 12 months through September was the largest since 2012 and was $113 bio. Much of the widening was as a result of interest. Borrowing has increased partially to make up for lower tax revenues. The gap for the fiscal year was $827 bio versus an adjusted $658 bio in fiscal 2017.

Meanwhile, asset managers have been scaling back their bullish positions on the futures as the hedge funds have been taking profit on their shorts.

Market volatility has seen that those assets that benefited from the Fed’s free money printing are now the most affected. Corporates, junk bonds, and tech stocks have all been recently pummelled. Treasuries are now on course for the third largest annual loss in forty years. Half of the stocks in the MSCI All-Country Index are now technically in bear territory.

The other asset that has everyone totally confused is the mighty greenback. The conundrum about the greenback is that it has underperformed developed countries but has been a significant performer against emerging markets. It has been some time since the U.S. last enjoyed the widest advantage against Britain, Germany, and Japan.

The U.S. 2,10 treasuries spreads versus German bonds are wide. Treasuries versus 10-year bunds are the widest for 30 years, 10-years versus 10-year gilts (UK) are the widest since the mid-80’s. This is partly explained by the Commodities Futures Trading Commission suggestion that speculators hold huge net longs in dollars versus G10 countries.

Short EMFX is explained by Robin Brookes of the Institute of International Finance – that the underperformance is solved by looking at oil. The rising oil price is exacerbating the U.S. current account deficit capping the upside. Oil prices are historically negative for the dollar.

Market Recap.

Equities: The S&P fell 0.59% and the Dow fell 0.35%. while the Stoxx gained 0.1 %, breaking the lead in from Asia. The Vix closed at 21.23.

Currencies: The Bloomberg Dollar Index fell 0.2%. while the yen gained 0.3% and the euro rose 0.3%.

Bonds: The ten-year closed around at 3.158%. The 2-year closed at 2.857% and the 30-year closed at 3.336%. The ten-year bund closed at 0.5060% and the OAT closed at 0.872%. The U.S. curve closed on the day with the following closes 2/10 at 29.5 bp, 2/30 at 47.9 bp and the 10/30 closed at 17.8 bp. The U.S. 5-year closed at 3.013%.

Commodities: WTI rose 0.4% and Gold rose 0.7%.

Bitcoin is trading at around U$6,384.

Aussie Market Today.

Looks like equities are on a selling trajectory. Commodities and the AUD may be the drivers today.

Bonds are an each way bet. The threat of further tariffs should see a bond rally but that’s just not happening. Investors and hedge funds appear to be winding back bets so a lot will depend on what they do and that will drive the Aussie bond market. I expect to see some selling.

The Aussie remains vulnerable as the interest differential between here and the U.S. remains negative and with a drought and a possible slowing of the economy. The AUD looks vulnerable as a trend. An uptick in commodities will help but a strong dollar could slow that move.

The direction for markets appears to be strongly influenced by Asia. Look north for some guidance.