On your mark.

The markets are now factoring in the rate cut in the U.S. as a Fed insurance policy. Earnings are expected to be weak in the third quarter. And the belief is that the rate cut will stop a significant slowdown. If the slowdown is prevented, then the hope is that the fourth quarter earnings will be good. And that’s what the equity market believes.

And the market needs some belief as 8 of the 11 sectors are forecast to see EPS declines as well as analysts sharply cutting second quarter results. Everyone is expecting earnings to be weaker. Hence, a Fed insurance policy (rate cut) helps the equity market.

Meanwhile, China posted its slowest GDP growth number since it first started posting GDP numbers in 1992. GDP rose 6.2% in the April-June period, down from 6.4% in the first quarter. The slowdown highlights the issues that China is facing in the trade war with the U.S. This is yet another sign of a slowing global economy as Trump wages a tariff war with many of the U.S. trading partners.

On the day, technology shone whilst energy and financials were amongst the laggards. The financial sector fell 0.5%. Boeing slipped 1%. Second quarter earnings reports start this week and analysts are expecting a 0.3% fall in profits, the first expected fall in 3 years. Volume on the exchanges was a meagre 5.39 bio shares versus a 20-day moving average of 6.69 bio shares a day.

The next piece of economic data, retail sales, will be important for treasuries. Yields rallied as investors looked to retail sales with the expectation the number will be weak. For bond investors, their main concern continues to be a slowdown in growth rather than fears about inflation.

The trade dispute is causing business to hold back on capex, raising prices and paying higher wages. And this points to weaker economic growth if the trend continues. A rate cut looks certain with a 72% chance of a 25 bp rate cut and a 28% of a 50bp rate cut.

Bitcoin could be in for a fall as scrutiny over cryptocurrencies increases. Facebook’s Libra digital coin is the reason as regulators and politicians alike are demanding scrutiny.  The U.S. regulators want cryptocurrency firms to seek a banking charter and subject themselves to U.S. and global regulations. Powell has raised issues on how Libra would impact on monetary policy and financial regulation.

Market Recap.

Equities: The S&P 500 rose 0.02% and the Dow rose 0.10%. The Vix closed at 12.68 while the Stoxx Europe 600 Index 0.2%.

Currencies: The euro fell 0.1% while the Bloomberg Dollar Spot Index rose 0.1%.

Bonds: (as at 4.30pm). The ten-year is trading at 2.09% while the 2-year is trading at 1.809% and the 30-year is at 2.61%. The U.S. curve closed on the day with the following closes 2/10 at 25.6 bp, 2/30 at 77.8 bp and the 10/30 closed at 52.1 bp. The U.S. 5-year closed at 1.846% and the 2/5 spread is now 1.1 bp. The ten-year bund closed at -0.293% and the British gilt closed at 0.801%. The 10-year yen gilt is trading -0.117%.

Commodities: WTI slipped 1.1%.

Bitcoin is trading around $10,822.

Aussie Market Today.

Stocks should be steady on the day with perhaps a hint of a rally. The trend will be confirmed by trading in Asia.

Bonds are likely to drift on the day. Sentiment will be driven by how the treasury market reacts to tonight’s U.S. retail sales. I expect bonds to rally a little and hold.

The bid tone in credit remains. Senior bank debt in the shorter maturities are in demand. Bank sub debt has widened some 10 bp since the recent APRA release on bank funding. Whilst spreads have widened there does not appear to be a lot of supply and as such the spreads could tighten very quickly should reasonable demand for paper appear.