In Vogue.

What a difference 24-hours makes. Just a little while ago investors were looking over their shoulders wondering where the next piece of alpha was coming from and today it seems that risk is now back in vogue. Investors piled on risk as it became apparent that Hong Kong may be stabilising, and that with the slower economic numbers the Fed will just have to cut to stimulate the economy. We have heard this chestnut before.

Powell now has one year to convince Trump that he should continue as the Fed Chairman should Trump be re-elected. The U.S. market is looking to Powell to help stimulate the economy and if anything, are forcing his hand. For a central banker, this is not a good space.
Wall Street did what it does when it appears as though risks have been averted and rallied. Prices were buoyed by some robust economic data out of China and a delay in lawmakers approval of a law to delay Brexit. Boris Johnson is finding it’s not so good being the leader. Technology stocks saw good gains up 1.7% on the day. Healthcare was flat. Tyson Foods fell 7.8% after cutting its 2019 earnings forecast.

The U.S. Treasury market is now poising itself for a fall in interest rates. Escalating trade tensions and fears of a recession has many analysts of the view that the Fed will cut at the close of its FOMC meeting September 17-18 meeting. The Fed’s beige book narrative suggests that the 12 regional Fed banks are of the view that trade tensions are slowing business activity. The St Louis Fed, for example, is indicating that general retailers and auto dealers are feeling the pinch. The Atlanta District has stagnated and is now falling. San Francisco reported increases in the sales of retail goods. Boston reported a positive retail outlook.

Meanwhile, 2-year treasuries hit their lowest since September 2017. The GDPNow tool is reflecting expectations that growth will slow in the 3rd quarter. The curve steepened on the day. The U.S. is not in a recession, but growth is slowing appreciably. For the rate cut junkies, the probability of a rate cut at the September FOMC by 25bp is 83.1% and a rate cut of 50 bp is 16.9%.

Market Recap.

Equities: The S&P 500 rose 1.08% The Dow rose 0.91%. The Vix closed at 17.33. The Stoxx rose 0.89%.

Currencies: The Bloomberg Dollar Spot Index fell 0.6% but later stabilised. The Euro gained 0.5%.

Bonds: (as at 4.30pm). The ten-year is trading at 1.471%. The 2-year is trading at 1.438% and the 30-year is at 1.97%. The U.S. curve closed on the day with the following closes 2/10 at  3.2 bp, 2/30 at 53.5 bp and the 10/30 closed at 50 bp. The U.S. 5-year closed at 1.321%. The 2/5 spread is now -11.6 bp. The ten-year bund closed at -0.675% and the British gilt closed at 0.495%. The 10-year yen gilt is trading -0.274%. The 10-year OAT (France) closed at -0.373 and the Italian 10-year bond (BTP) is now trading at 0.81% and the 30-year at 1.86%.

Commodities: Gold rose 0.5%, WTI rallied overnight 4.4%.

Bitcoin is trading around $10,589.

Aussie Market Today.

Stocks to rally on the day as risk pressures have eased a little for the moment. Bonds currently look marginally expensive. Expect some drift a little wider on the day. Credit on the day looks well bid and especially the new Societe Generale perp non-call 5-year. The issue now has subscriptions in excess of $1.7 bio. The issue has tightened since launch by about 13bp.

Geopolitical risks remain high and still need to be monitored. Watch developments out of Hong Kong as the protests have a real chance of upsetting sentiment in the region. Watch for a tweet or a comment on trade out of China, either commentary will have the ability to move markets.