Broken records.

Records are meant to be broken and records were broken today. The Nasdaq Composite and S&P 500 both finished at new highs as better than forecast earnings have helped the stock market. So far, this March quarter, approximately 80% of S&P 500 companies reported have beaten estimates.  Profits were expected to decline by 1.3% in the first quarter and that simply is not the case.

On the day, the equity market saw 10 of the11 major S&P sectors higher. Healthcare rebounded after earlier falling 6.7% over the past two weeks on policy concerns. Consumer staples were the only sector not to record a high. Energy and utilities were the weakest performers on the day. The S&P 500 posted 47 new 52-week highs and volume on the exchange was good with 6.75 billion shares changing hands versus a 20-day average of 6.64 billion.

It’s hard to believe that since Christmas Eve the S&P 500 is up 25% and with the stock market rallying so hard its hard to believe that the Fed will think about easing in the foreseeable future. Something dramatic will be required.

The yield curve steepened marginally on the day with the 2-10 year spread closing around 20.7, the second consecutive day above 20 and a level that over the previous few months has proved difficult to breach.

Yields were lower on the day and that was across all maturities. The most significant dips were in the 2, 5 and 7-year notes and all are auctioned this week. The 2-year rallied 2.5 bp on investor demand. The narrative appears to be continuing with prices falling ahead of the auction and then rallying after the auction. The 5-year fell 2.5 bp and the 7-year fell 2.5bp. Both were sold earlier in the week and will be auctioned Wednesday and Thursday respectively.

Investment bond funds were a little more bullish this month on the 10-years. Large investment managers bought $14.875 bio at the 10-year note auction compared to $14.253 bio the previous month. Overseas investors purchased $5.841 bio of the latest 3-year supply compared to $4.967 bio the previous month.

Meiji Life is said to be considering diversifying its foreign bond holdings by diversifying into more currencies. The insurer is adding corporate credit in Kroner and Canadian dollars. The Life Company is also investing in euro if they offer attractive yields after being swapped back to yen. The ratio of hedged and unhedged is 4:6.

Oil looks set to continue to rally. The Saudi’s appear to be in no mood in helping Trump and others with filling the void left by Trump’s embargo on Iranian oil. Apparently, the Saudi’s and UAE pledged to increase production, but production has been cut over the past few months with the market becoming tighter as a result of Saudi activities.

Before the imposition of sanctions, Iran was the fourth largest OPEC producer with around 3 mio barrels per day. April exports have slumped to 1 mio barrels per day.

China imports about 585,400 barrel per day from Iran and is Iran’s largest customer.
The oil market is seeing a premium for near months with the later months at a lower price leading to backwardation.

Look for something dramatic. That something dramatic may yet come as Democrats press Trump to release his tax returns and with Trump not being compliant. Trump is citing the audit on his financials that is continuing. The Democrats appear to be pushing the release with a view to having the issue resolved in the U.S. Supreme Court.

The twist comes in the form of his former lawyer Michael Cohen who does not believe that Trump’s taxes are under audit and that Trump feared releasing his financials as that could lead to an audit and IRS tax penalties.

The Rant

Bubbles are on the Fed’s agenda, or rather, the monitoring of the risk of bubbles. The text referring to the bubbles may be found in the minutes. And no, the members are not running around the Fed with their soap bubble pipes.

What concerns the members is that the last two expansions did not end up in a burst of inflation but rather the alchemy of the financial froth creating financial instruments and expectations of returns far in excess of what could reasonably persist. The first failure was the dot-com stock market boom and that was followed by a housing boom and the creation of CDOs.

For the Fed, the fear is that the neutral rate, which is about 2.8%, is now considered so low that super risky behaviour may become the norm. Risk is forgotten as the hunt for yield drives caution to the wind.

The Fed put policy on hold earlier in the year and that dovish shift reignited the stock market.  Despite the fact that the S&P 500 is up 16% since early 2019, those gains have failed to satisfy Trump who continues to berate the Fed for holding back the economy and stock market. Financial conditions are accommodative, and it is hard to see how conditions could be much better.

Meanwhile, leverage is increasing and as we all know too much leverage leads to tears.

Market Recap.

Equities: The S&P 500 rose 0.88%. The Dow was up 0.55%.  The Vix closed at 12.28. The Stoxx Europe 600 Index rose 0.2%.

Currencies: The Bloomberg Dollar index rallied 0.4%. The euro fell 0.3%. The yen gained 0.1%.

Bonds: (as at 4.30pm). The ten-year is trading at 2.569%. The 2-year is trading at 2.364% and the 30-year is at 2.982%. The U.S. curve closed on the day with the following closes 2/10 at 19.9 bp, 2/30 at 61.5 bp and the 10/30 closed at 41.4 bp. The U.S. 5-year closed at 2.361%. The 2/5 spread is now -0.7 bp. The ten-year bund closed at 0.042% and the British gilt closed at 1.225%. The 10-year yen gilt is trading -0.03%.

Commodities: WTI rose 0.9%.  Gold fell 0.2% along with copper which also fell 0.5%.

Bitcoin is trading around $5,590.

Aussie Market Today.

Stocks may let the shackles off and stage a rally with a burst of enthusiasm. Risk off globally should help the spirit. Some profit taking may take place later in the afternoon ahead of Thursday’s ANZAC Day public holiday.

Bonds should drift along with prices rising and yield falling. Bonds seem to be in a rally mode at present as investors search for yield. With the RBA being mooted to drop rates because inflation remains low long bonds should see demand.

My own view is that the RBA does not need to ease as property is doing fine, after rebounding these past few weeks. Commodities are strong and the only problem is wages. Wages won’t rise because structurally many employees are in the Uber economy. That is, they are underemployed in low-value jobs.

What the RBA should be concerned about is why these employees are not transitioning to value-added employment where the wages are higher. The same can also be said of many employees who are working on a consultative basis with relatively few now actually in full-time work. For example, many employees now are paid on an as-needed basis with the employee responsible for their own holiday pay, superannuation, etc. and if they don’t work, they don’t get paid. Such is the bias of the just in time economy. Wages under that structure will remain low.