RALLY RALLY RALLY!

That’s exactly what Bitcoin did and so too the U.S. stock market. Bitcoin hit $16,000 today and is now probably higher. The first futures exchange for Bitcoin commences Sunday 6pm on CBOE’s Global Inc Futures Exchange. That probably will bring even more volatility as hedge funds weigh in with their buying of the digital currency.

Bitcoin has surged some 40% over the last 40 hours and if you are in South Korea the price is even higher. You see in South Korea they are prepared to pay 20% more. So those who bought a few days ago are in the money. That said the premium is akin to someone paying U.S. $1 to purchase NZD$1. It makes no sense at all unless you are a Kiwi who would passionately defend the worth of their currency.

Even stranger for Bitcoin’s rise is that one of the miners that bitcoin relies on looks like their digital wallet of some $600mio was emptied. This raises interesting questions for users of the digital currency where there is no base behind the currency and where it is reliant on a number of volunteers who solve and code complex algorithms thus allowing free movement of the currency.

Or perhaps the rise of bitcoin has something to do with geopolitical uncertainty in a time of rising tensions and a loss of faith in institutions. Books will be written about this phenomena in the future.

 

Meanwhile, amongst the giddiness of bitcoin’s rise, the U.S. equity market surged ahead. The rising price of oil was part of the catalyst that had the market rallying. Trump’s comments on the day went some way to spurring the surge in U.S. equity markets.

Trump announced that he was confident a Government shutdown would be avoided and that taxes would be cut to 20%. Currently, a number of Senators are meeting with some Congress members to reconcile the tax bill, thrash out any concerns so that the tax bill can then be presented.

Bond, meanwhile, slumped. With the fear of a shutdown expected to be avoided, the yield curve steepened. Bond investors will be looking to Friday’s Labor Department release.

In Europe, bonds are taking a slightly different course with Euro zone countries issuing long dated bonds. Demand remains persistently high and that’s probably because most country curves out to 5-8 years are negative.

Geopolitical risk has risen significantly since Trump announced his intention to relocate the U.S. Embassy to Jerusalem and recognise Jerusalem as Israel’s capital. Hamas has called for unrest as Palestinian anger erupts over the announcement. For Jordan, this is also a significant hurt as they were once custodians of Jerusalem. This rise in geopolitical risk could translate into a flight to safety and if that occurs then bonds no doubt will rally.

Recap:

Equities: The S&P 500 rose 0.3%. The Dow rose 0.27% and the Nasdaq rose 0.56% The Stoxx 600 was unchanged.

Currencies: The Bloomberg Dollar Spot Index was rose 0.3%. The yen fell 0.7%.

Bonds: The 2-year closed at 1.80%. The U.S. 10-year closed at 2.36%. The 30-year closed at 2.76 %. The 2/10 closed at 55.6, the 2/30 at 95.8 bp and the 10/30 closed at 40bp. The European 10-year benchmark closes were, gilts closed at 1.25%, bunds at 0.29% and OAT’s 0.6%.

Commodities: Gold fell 1.5% and WTI rose 1.2%. Copper regained 0.1%

Aussie Market Today.

The environment has changed a little. The weak data suggests that rates will be steady for some time yet and may even fall a little. The currency looks set to be sold and that trend may continue for a while. Bonds look vulnerable with a falling currency outlook.

With a spread of 16.6 between U.S. 10-years and Aussie 10-years this spread can tighten further if the currency falls. Watch the basis on the swaps and this will provide a guide to overseas investors thoughts.

Equities should be solid and most likely in the current environment rally.

Credit remains in demand as investors hunt for returns. Spreads are especially tight but not outrageously tight. Spreads can tighten further

Geopolitical tensions are once again rising albeit slowly at this stage.