Mighty words.

With a single sentence Powell saved the day. The Fed Chairman said that he was open to rate cuts and after being bullied by the bond market rally, the scene was set for a spectacular rally in equities. It was a party.

Also adding to the festivities was the news that the Mexican President said that he hoped to reach a deal with the U.S. Carmakers and chipmakers rallied, the peso jumped, and everyone was happy except the bond traders. Adding more fuel to the party was the news that Republican senators were warning the Trump administration that they were ready to block any efforts to impose duties on Mexican imports.

And the party continued and the fuse lit.

So, what is new in all of this? The probability of a rate cut was more than 95% (CME) and bonds were factoring in a cut. Technology gained 3.3%, led by Apple and Microsoft. The bank index rose because bonds edged higher (5 basis points or so) and the bank index was up 3.65%. The real estate sector fell 0.6% and was the only sector to do so and utilities were flat. Volume was good with some 7.53 bio shares being exchanged versus a 20 day moving average of 7.16 bio shares.

What we may have seen today was a reaction to being too short. For the first time in 2019, stocks were in oversold territory. This allowed the market to then react the way it did as shorts were covering as stocks rallied. This activity no doubt also helped to spur the gains. The short position is a rare event and has occurred 1% of the time since March 2009. The longest streak for a net short position is 4 days.

With bond yields so low and the lowest since September 2017, a shakeout was inevitable. Comments from Bullard and Powell suggest now that a rate cut is likely, so any pullback is a healthy trading signal and sets the market up for further gains in the future. The market is now viewing a rate cut as pencilled in, and it’s now just a timing issue. Demand is being seen in the shorter dated maturities whilst investors are shunning the long end. That’s the reason for the yield curve steepening.

Short end interest rate traders are pricing in 4 rate cuts (yes that’s right) between now and mid-2020. Donald will be buoyed by that news. Vice Chair Richard Clarida has tried to bring some sense to the markets by saying the “the Fed won’t be handcuffed” to market prices.

Falling bond rates in the U.S. are affecting sentiment in Europe. Bond yields are falling in sympathy with the U.S. market. Inflation in the EU is falling, and investors are betting that the ECB will have to ease and support the EU economy.

Once again, the North Koreans have threatened the U.S. by stating not to try their patience. The Stalinist Republic may be feeling a little emboldened by China’s response to the U.S. over trade.

The Rant.

Climate change is often poo pooed by naysayers and vested interests as being irrelevant. However, a recent study by major corporations has revealed that they are indeed quite concerned. And the impact on business could easily be at least $1 tr. This study involved 200 of the world’s largest listed companies and expect the changes in climate could cost them over the next 5 years.

CDP carried out the survey and it involved companies such as Apple, Microsoft, BHP, UBS, Nestle, China Mobile amongst many. Costs could come from chaotic weather, pricing of emissions, hotter temperatures. In fact, a raft of variables that are climate related and expected to impact on business.

Volatile weather patterns are making it difficult in deciding which crops to plant. And this can lead to significant volatility in pricing of feed commodities. A number of U.S. food processors such as Tyson are now concerned about the cost of feed and the impact it has on feeding its farm animals. Increase in temperature can kill plants as much as cold.

However, there are also upsides. There are potential opportunities worth $2.1 tr by taking advantage of changes in demand. For example, the rapid uptake of electric cars has caught many off guard.

Market Recap.

Equities: The S&P 500 rose 2.14% and the Dow rose 2.06%.  The Vix closed at 16.97 while the Stoxx Europe 600 Index rose 0.6%.

Currencies: The Bloomberg Dollar Index fell 0.2% while the euro rose 0.1%.

Bonds: (as at 4.30pm). The ten-year is trading at 2.121%. The 2-year is trading at 1.879% and the 30-year is at 2.603%. The U.S. curve closed on the day with the following closes 2/10 at 24 bp, 2/30 at 72.4 bp and the 10/30 closed at 48.2 bp. The U.S. 5-year closed at 1.886%. The 2/5 spread is now 0.60 bp. The ten-year bund closed at -0.205% and the British gilt closed at 0.902%. The 10-year yen gilt is trading -0.104%.

Commodities: Crude gained 0.4%.

Bitcoin is trading around $7,632.

Aussie Market Today.

A stunning result overnight and the equity market should rally pending any commentary that could change sentiment. Stocks have a double whammy here, a rate cut yesterday and a strong surge overnight. Stocks are set to rally.

We had the rate cut yesterday and saw some as expected selling of bonds before the market settled. The tricky part now is to not get too carried away just in case the economy heats up meaning that bonds would be sold. For the moment, bonds should be in a holding pattern. They will most likely drift a little higher but not too much.

The rally in equities will boost credit and credit tightened in response to the equity rally.