Serve Returned.

It’s now game on. If Trump believed that trade wars were easy to win, he now has a battle royale on his hands. The Chinese have returned served by allowing the yuan to slide to the lowest level in a decade. Bonds rallied, gold rallied, and the yen surged ahead.

The equity market saw some $700 bio of value lost today as the S&P 500 slipped about 3%. The interesting fact on the day that in that index only 11 stocks were not lower on the day. Apple and IBM were off significantly. Apple was off 5.2%. The Philadelphia Semiconductor Index was off 4.4%. Volume was strong with some 9.41 bio shares exchanged versus a 20-day moving average of 6.8bio shares. The S&P 500 is now 6% below its closing high July 26.

Investors are now only just starting to realise that trade is affecting the broader economies and not so easily dismissed. The party time in the U.S. may be coming to an end. Demand for haven assets or risk off investments surged. Bitcoin now considered a haven asset surged amidst the market confusion. Swaps are showing bets that the swaps market expects the Fed to ease another 100bp by December 2020.

The bond curve continues to invert raising fears that the looming possible recession is going to be a bad one. The three-month Treasury bill rate and 10 -year treasury spread is now 27bp the widest since April 2007 (Reuters). A curve inversion has preceded every U.S. recession in the past 50 years (Reuters).

The mid-west farmers are also on the hook as the trade war escalates. China has slammed the door on farm purchases after offering an olive branch as recently as last month. Chinese companies are no longer buying U.S. agricultural products.

The Rant.

The next wave of borrowing activity may well be companies taking advantage of cheap money. Falling borrowing rates are squeezing the global equity supply as companies exploit cheap money to buy-back shares.

The shares on issue have fallen as some 80% of firms in the U.S. have conducted share buybacks and the story is true for a number of other countries. Net global equity supply is expected to be zero this year, the same as in 2017 and 2018 and that’s a significant reason why shares have defied gravity and rallied as they have over the past few years. The collapse of bond yields has made it far more attractive to borrow than raise equity.

Buybacks are now raging in Europe as the U.S. has slowed from $3.1 bio daily to $2.8 bio. European share buybacks are now about $100 bio over the year. This is dwarfed by the U.S. at $800 bio.

Market Recap.

Equities: The S&P 500 fell 2.98% The Dow fell 2.90%. The Vix closed at 24.59. The Stoxx Europe 600 Index fell 2.3%.

Currencies: The euro rose 0.8%. The Bloomberg Dollar Spot Index fell 0.1%.

Bonds: (as at 4.30pm). The ten-year is trading at 1.718%. The 2-year is trading at 1.579% and the 30-year is at 2.264%. The U.S. curve closed on the day with the following closes 2/10 at 13.4bp, 2/30 at 67.9 bp and the 10/30 closed at 54.3 bp. The U.S. 5-year closed at 1.528%. The 2/5 spread is now -5.9 bp. The ten-year bund closed at -0.552% and the British gilt closed at 0.515%. The 10-year yen gilt is trading -0.194%. The 10-year OAT (France) is now -0.236.

Commodities: Gold rose to $1,476.50.

Bitcoin is trading around $11,825.

Aussie Market Today.

Stocks no doubt will be sold today. With concerns over China weaponizing the yuan and with the prospect of demand for commodities stalling the ASX has a few questions to ask.

Bonds will rally. Once again, we are in risk off territory. The U.S. treasuries had a strong rally overnight and so too European bonds. We would need some resolution on trade between the U.S. and China for this trend to stall. Bonds should rally another 10bp or so.

Credit was smashed last night after equities were sold. This may provide good buying opportunities as spreads no doubt will continue to widen in response to the Aussie Itraxx. The caveat will be though that demand will offset the sell-off in credit. A full widening is not expected.

At least one more rate cut is now expected.

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.