Who says markets are always different and exciting? The exciting thing about today was that it was more of the same with a quiet underestimated milestone reached yet again in the equities market and a small sell off in the bonds. Stocks are on their best run for four years and the Vix is now at an all-time low having pushed to 9.13. In addition, volatility remains persistently very low.
The equity market saw an eighth successive gain. European equities gained when the Catalans said that they were stalling their push for independence.
Data appears to be the reason for this Autumn malaise. The markets are looking towards Friday’s non-farm payrolls numbers, and next week’s treasury auctions as indicators of market strength. The CPI is also another number that markets and the Fed are monitoring as a barometer of the strength of the U.S. economy and as a guide as to what to do next.
The odds are mounting that Janet Yellen won’t be asked to serve another term as Chairman of the Fed’s Board of Governors. It would appear as though Trump has another candidate in mind and that perhaps could be a good thing. The bond market would be a little more concerned should Taylor be appointed. Taylor is quite hawkish and his modelling suggests that the Fed Funds should be 3.5% not 1.25%. Thus, the bond market would enter into a bear phase should Taylor be appointed.
The IMF has waded into the cryptocurrency debate and there is some discussion about whether there will be an IMF bitcoin or cryptocoin in some form.
The trade gap in the U.S. has narrowed to an 11-month low as exports increased for the month of August. Whirlpool is likely to seek some form of protectionism from the U.S. government as it struggles to compete against the innovation that the South Korean white goods manufacturers bring to the U.S. market. The Chairman of Whirlpool claims that the likes of Samsung and LG have cost some 1300 jobs. Perhaps instead the company should look at innovation and capex to increase the desirability of their product.
The GOP are moving forward with their tax reform. San Francisco Fed President John Williams has cautioned suggesting that a tax cut without an increase in productivity would feed unsustainable growth and cause a possible recession. The Trump plan would add $2.4 tr to the deficit over the next decade at a time when the deficit is already $20 tr according to the non-partisan Tax Policy Center a Washington tax think tank. No doubt the Democrats will be stalling on their vote to support Trump’s initiatives.
The German Industry has been told to prepare for a hard Brexit by their Industry body after talks with the UK remain slow and often stall.
Equities: hit a new high. The S&P 500 climbed 0.6% while the Dow rose 0.43% to set a seventh successive record close, and the Stoxx 600 gained 0.2%
Currencies: the euro fell 0.5% and the pound fell 1%. The Bloomberg Dollar Spot Index rose 0.6%
Bonds: held steady. The U.S. 10-year closed slightly weaker to close 2.35%. The U.S. bond curve was steady with the 2/10 closing at 85.7 bp, the 2/30 at 139.8 bp, and the 10/30 closed at 53.9bp. The treasury closes were 2 -year closing at 1.49%, the 10-year at 2.35% and the 30-year at 2.89%. JPM released a survey that showed net shorts on long-dated U.S. treasuries rose to a record high. The tax reform is the reasoning behind the shorts. However, with the market so short the likely move will be to rally as the shorts get squeezed.
Commodities: Gold fell 0.5% and WTI rose 1.4%. Copper surged 2.8%. Zinc fell 0.5% after touching earlier its highest point since 2007 and is up 28% for the year. Nickel closed lower, down 0.7% while lead rose 1.3%. The base metals are impacted by Chinese policy and in some cases falling inventory demand.
Aussie Market Today.
The equity market should continue its rally and look to mark stronger closes. The bonds will probably drift weaker over the day. However, with the non-farm payrolls due Friday Aussie bonds are likely to sell off ahead of the number. The number is expected to be weaker. However, with the weekend and markets closed it is unlikely that bond traders will be too long going into the weekend. In addition, geopolitical risk has waned a little but still remains a significant risk.