Geopolitical risk today was raised significantly after some 50 Palestinians were shot by Israeli soldiers whilst demonstrating in the Gaza as the U.S. opened its embassy in Jerusalem. Bonds held steady as a result, after initially looking as though the 3% barrier was about to be broken. Equities rallied as the 10- year eventually pushed through the magical 3% to close slightly above 3%.
Equities also rallied as a result of easing trade tensions between the U.S and China. The Trump administration adopted a more conciliatory tone after eyeing remedies that would help the No. 2 Chinese telecommunications equipment maker. As a result, the Vix has now dropped comfortably below its average and the equity market rallied.
Tensions in the Middle East were heightened on the day, resulting in oil surging up 1.1% on fears of possible shutdowns. The rising yields in bonds has not been good, however, for some of those high or consistent dividend payers such as REITS and Utilities. Interest rate sensitive stocks have generally been lower during this recent equity rally.
A more hawkish tone emanated from Fed officials and European Central Bankers. On the day, the words had little effect. However, once the civil unrest abates in Israel, bond traders will look to push bond yields higher. Loretta Mester, the President of the Cleveland Fed, suggested that rate hikes could be more frequent as the U.S. economy gathers pace. The probability of three more rates hikes rose accordingly, from 39% a month ago to 52%.
The Eurozone saw bonds move higher following ECB remarks. Italy remains the focus for many traders as it appears as though the 5-star Movement and far-right league neared a deal to fuse a workable coalition government. This is being seen as a worst-case result.
Earnings were the driver of today’s equity rally. With 91% of companies having now reported their first quarter results, the tone is positive. Earnings are on pace to produce a 26.1% increase in earnings, largely as a result of the tax cuts. Volume on the exchanges today were below the average with some 5.96 bio shares trading compared to 6.65 billion.
As the Trump trade deals take shape, investors do need to consider the changing importance of the need for dollars. As more bilateral trade deals are struck, there becomes less of a need for dollars and over time this will upset the dollar market causing the dollar to become weaker and less relevant.
Over time a change in the need for dollars will mean that U.S. borrowers will no longer be advantaged with low interest rates. With time, the triple A status of the U.S. could come under threat as more deals are done in yuan, yen, euro and pounds.
For emerging market economies, this would be a good thing. For more established countries, this would necessitate a change in sovereign bond holdings and investment philosophy. The world order is not about to change tomorrow. However, it is something that should be considered over time.
Equities: The S&P 500 closed up 0.1% The Dow rose 0.27% while the Stoxx fell 0.1%.
Currencies: The Bloomberg Dollar Index rose 0.2%. The euro fell 0.1%.
Bonds: The ten-year closed around at 3.002%. The 2-year closed at 2.55% and the 30-year closed at 3.132%. The ten-year bund closed at 0.614% and the UK gilt closed at 1.476% and the OAT closed at 0.838%. The U.S. curve closed the day with the following closes 2/10 at 45 bp, 2/30 at 58.3 bp and the 10/30, closed at 13.1 bp. The U.S. 5-year closed at 2.86%.
Commodities: WTI rose 0.6%. Gold fell 0.5%.
Bitcoin is trading around $8,828.
Aussie Market Today.
The Aussie market should see equities continue to rally. The mood looks positive for the moment.
Bonds to be slightly weaker on the day as the offshore trend is towards weakness. Geopolitical risk will dominate should the Gaza flare again.