The risk train.

In an otherwise standard day, you know,  the Dow a little up and S&P500 down a smidge after a strong rally,  one could be beguiled to think not much was happening when indeed there is and markets are acting in a somewhat peculiar way.

In the U.S., political uncertainty is being driven by the GOP and Trump’s resolute desire to have Supreme Court Nominee Kavanaugh elected. Kavanaugh is, of course, a very conservative pro-business, pro-life nominee and is a capable replacement for Judge Scalia and placing the balance of the Court pro-GOP. The only problem is that the nomination is finding a number of hurdles and it is reported that the GOP is losing the support of married women, an otherwise strong and solid base.

Trump needs some distractions and a few wins. He received the win over the weekend, along with Trudeau, when the final leg of the new NAFTA was signed. It is said that Trump wanted to bed down a number of trade deals before he tackles China. The way this is all panning out, December looks to be the likely month and the mid-terms would have well and truly passed.

For the equity market, this is noise. Nothing major but something to think about.  So for the U.S. investor, the booming economy can allow a little more of a run-up in valuations and that’s pretty much what happened. Intel lifted the blue chips, and retailers fell after Amazon said they would raise wages for their employees. Boeing and Caterpillar both hit fresh new highs. Comments from Powell ably assisted the equity market as he shrugged off talk about inflation.

For the Europeans, it was a different story. Italy has moved from a quaint distraction to a serious problem. European shares slid as concerns mounted that Italy could precipitate a debt crisis. Equities declined and bunds, OAT’s, gilts all rallied. (Bonds issued by Germany, France, and UK.) The Italians appear to push back hard at the EU and have indicated that life may be better if they left the EU.  At least that’s what their Economic Minister Borghi suggested today.

The equity market was concerned and so too the bond market and Italian 10-year bonds (BTP’s) were smashed, rising some 15 bp in yield before recovering about 5bp after Prime Minister Conte said he was committed to the euro. During the melee at one point, the 5-year’s rose 20bp in yield before closing 9bp higher to close at 2.65%. For Europeans, the day became a risk-off day. The bund/BTP spread is now at 295 the widest in 5 years.  As a result, the other outlier economies, Greece Portugal and Spain were all sold.

In Asia, the story is with China, out until the 5th of October.  However,  weaker Chinese factory growth saw stocks down in Hong Kong.

And in the news of the day, something I know you have all been looking forward to, Bolivia is looking to return to the foreign bond market in 2019. Bolivia is expected to issue $1 bio in part to cover their $4.4 bio in needs that they must cover next year.

GE is now rated BBB+ by S&P.  It is likely that Fitch and Moody’s will follow suit. GE was once rated AAA and lost its triple-A in 2009. Since then, it has seen a steady slide in its ratings as profitability has dried up. GE Capital (BBB+) has some $76 bio in outstanding debt. Its 2035 bond traded 10 bp wider on the rating announcement.

Market Recap.

Equities: The S&P fell 0.04% while the Dow rose 0.46% and the Stoxx fell 0.5%. The Vix closed 12.05.

Currencies: The Bloomberg Dollar Index gained 0.2%. The euro fell 0.4% and the yen rose 0.3% and the pound fell 0.5%.

Bonds: The ten-year closed around at 3.06%. The 2-year closed at 2.815% and the 30-year closed at 3.214%. The ten-year bund closed at 0.42% and the OAT closed at 0.784%. The U.S. curve closed on the day with the following closes 2/10 at 24.8 bp, 2/30 at 40.2 bp and the 10/30 closed at 15.2 bp. The U.S. 5-year closed at 2.95%.

Italian 10-years 3.45%.

Commodities: WTI fell 0.2% while Gold jumped 1.3%.

Bitcoin is trading at around $6,525.

Aussie Market Today.

Equities will probably take their lead from offshore. Europe was weak, Asia weakish and the U.S. mildly mixed, so what to do on the day? Probably nibble away and that’s what I think will happen.  The equity market can just inch up a little. For the real direction, we will have to see the Chinese open on the 5th of October.

What can one say? With rates held steady by the RBA and 26 straight months of no increase in rates and a steady economy with a tightening credit cycle, bonds are once again looking appealing given the recent rises in bond yields. The arbitrage between the U.S. and Australia could still yet play a part but for the moment with political uncertainty in Europe and elsewhere bonds can rally.

The Aussie dollar looks weak against the U.S. dollar. For the moment, the game is risk off.  Unfortunately, that means the Aussie is vulnerable.  Combine that with lower rates versus the U.S. in a tightening cycle,  means the Aussie could go weaker.