MUCH ADO ABOUT NOTHING.

Retailers were the word today as far as the U.S. equity markets were concerned. Buoyed by same-store sales exceeding expectations, Macy’s, once the darling of Wall Street, led the advance. Following Macy’s advance, other retailers such as Target and L Brands surged.  Macy’s, following the release, raised its targets for fiscal 2018. The shares surged 11% on the day. That’s the news for the day.

For the moment, not too many things appear to be able to spook the equity market. Political uncertainty is not hindering the market advance nor are bond yields.

The economic news on the day was somewhat mixed with Industrial production showing a solid increase, expanding at 0.7% in April, and manufacturing output rising 0.5 %. However, housing starts fell 3.7% and multi family dwelling saw an 11.3% decline

With all this good news, the bond market bears are starting to stir. The 10-year bond is now at a 7-year high and if yields were to push through 3.1% another wave of selling is expected. The 10-year treasury is now trading around 3.09%. Importantly, at these elevated levels there does not appear to be too much buying interest.   Hence, the bears are stirring.

The recent releases of economic data suggest that the U.S. economy is spluttering rather than rebounding.   Equity investors are taking the approach that the Fed will be a reluctant hiker, and are ignoring the widening deficit, increased issuance, and a looming issue with the debt ceiling.

Wage growth looms as a likely indicator for the bears.  However, with productivity remaining weak, wages growth is unlikely to provide the catalyst the bond bears are looking for.

The hedge funds are looming as a major seller of bonds. Shorts on the CFTC remain around 400,000 contracts and these positions are not about to be reversed anytime soon. This should be a concern.

In 2009, shorts went from neutral to 275,000 contracts and bonds moved from 3% to 3.95%. A flip to long 100,000 saw yields fall to 2.4%.  The subsequent flip from long positions to short positions, commencing in 2017,  has seen bond yields rise.

Italy once again is proving to be the problem child for Europe. With the possibility of the anti-establishment 5-star party asking for 250 billion euros of Italian debt, Italian stocks fell 2.3% and bond yields spiked 19 bp. The Italian election is looming large in many investors’ eyes.

NAFTA talks are weighing on investment in both Canada and Mexico and is the reason why the Canadian central bank is keeping interest rates low.

Europe has been rattled by Trump’s withdrawal from the Iran deal. In a sharp, rebuke Tusk (former Polish Prime Minister) has laid out the European view, “Because, thanks to him we have got rid of all illusions . He has made us realise that if you need a helping hand, you will find one at the end of your arm.”  A trans-atlantic chill is blowing.

Recap. 

Equities: The S&P 500 rose 0.4%. The Dow closed up 0.25%. The Stoxx rose 0.2%.

Currencies: The Bloomberg Dollar Index fell about 0.1%. The euro fell 0.3% and the yen rose 0.2%.

Bonds: The ten-year closed around at 3.104%. The 2-year closed at 2.593% and the 30-year closed at 3.223%. The ten-year bund closed at 0.612% and the UK gilt closed at 1.508% and the OAT closed at 0.849%.

The U.S. curve closed the day with the following closes 2/10 at 50.7 bp, 2/30 at 62.8 bp and the 10/30 closed at 11.9 bp. The U.S. 5-year closed at 2.944%.

Commodities: WTI fell 0.6% and Gold dipped 0.3%

Bitcoin is trading around $8,311.

Aussie Market Today.

On balance, the equity market should see some gains on the day.

Bonds could see continued offshore buying which is holding bond yields steady.