It was almost late September and what a day! Risk on became part of the day’s vocabulary but so too Trump’s boasts. On those, the Don is without peer. It seems Donald is miffed because the Puerto Rican President clashed with Trump over Typhoon Marie as Trump doubles down on what a great job he will do fixing damage made by Typhoon Florence. And at the same time blaming the Democrats for not doing anything, being the cause and a whole lot of other stuff. Unfortunately, these missives hit his credibility and take away the prestige of the Office of the President. His loyal band of followers dotes on his every word. And unfortunately, this only encourages him more to be even more extreme in his comments.
For markets, however, they are more concerned that the Administration is meeting the Chinese and rumour has it, that talks are progressing. And as so often happens of late, any news or rumour of tariffs not being implemented means putting risk on. And that has now been happening the last four trading days.
The winners on the day for equities were information technology and the healthcare sector. The lower inflation rate also has the market confused now on Fed rate hikes. The feeling is that with a benign inflation rate the Fed will not be quite so anxious to hike rates and that is good for the equity market. Is the market undergoing a relief rally? Quite possibly. We will need to see how markets perform over the next few days.
JP Morgan today warned the markets about a possible crisis in 2020. According to their model, credit spreads could widen 135 bp and equities could fall as much as 20%. The model calculates outcomes based on the length of economic expansion potential duration of the next recession, the degree of leverage and asset-price valuations. It is a model and economists are notoriously wrong at picking movements, so no need to fret just yet. But it is interesting to note that this is the third major trader/ bank to come out with a negative market over the past week. One could say if everyone is heading in the same direction then it’s almost time to change tact.
Bond investors leaned on Lael Brainard’s comments today as a guide to what the Fed and hence Powell is directing policy. Brainard added a cautionary tone but suggested that should inflation pick up the Fed will act. Meanwhile, the 5-years appear to have entered the oversold zone and the 2–years look a little toppy. The 30-year auction went off without a hitch and was right on the money, highlighting strong demand at current levels. Primary dealers who are responsible for absorbing the excess not purchased by direct or indirect bidders took 27% of today’s auction. That’s the lowest level since April 2018. Once again fund managers and foreign central banks took almost 62%. The cover ratio was 2.34 times.
The ECB has kept policy unchanged as expected and is on track to end bond purchases this year and raise interest rates next autumn. The economic fundamentals are working for the ECB. In Draghi’s comments today he opined about rising uncertainties caused by tariffs and rising protectionism on emerging countries. He cited Turkey as an example of the impact of these forces. Policy normalisation was also proffered up as a risk. Suddenly rates look like moving and finally investors may start to see real returns for risk reward as the era of negative interest rates and free money draws to a close.
On another note, GM noted today that it was recalling some 1 mio full-size pickups and SUVs due to a fault where the vehicle can suddenly lose then regain electric power assist in low-speed turns.
Equities: The S&P rose 0.5% . The Dow rose 0.6%. The Stoxx 600 fell 0.2%. The Vix closed 12.37.
Currencies: The Bloomberg Dollar Index fell 0.3% and the euro rose 0.5%. The Turkish lira rebounded with a 4.1% rise after the Central Bank hiked rates.
Bonds: The ten-year closed around at 2.97%. The 2-year closed at 2.75% and the 30-year closed at 3.11 %. The ten-year bund closed at 0.423% and the OAT closed at 0.733%. The U.S. curve closed on the day with the following closes 2/10 at 20.9 bp, 2/30 at 34.6 bp and the 10/30 closed at 13.5 bp. The U.S. 5-year closed at 2.876%.
Commodities: WTI fell 2.3% and Gold fell 0.4%.
Bitcoin is trading at around $6458.
Aussie Market Today.
Aussie equities are likely to continue the rally into today.
Bonds could be a little confused today. With not a lot to go on and the weekend looming and with the direction being on the short side, one could be tempted to square the book heading into the weekend. After all, Trump could lose his patience with China, talk about tariffs and all of a sudden we are risk off again.
The Aussie dollar improved overnight and this appears to be on the back of improving trade talks.