Stocks started the day with a sense of disbelief. After all what was the reason to rally? Stocks fell some 0.8% before rebounding. It’s just that confidence is shaken. The tweets suggesting that a deal with China can be reached are being met with feigned optimism and perhaps a touch of resignation that the tweets are just air mixed with well perhaps something could happen.
All these emotions are stirring traders and frankly most don’t have a clue and we are all shadow boxing. On the day, financials were a little weaker along with tech.
But what to make of a now dovish Fed? Do we view Powell’s recent comment through the prism of taking instructions from Trump? And in which case the independence of the Fed is ruined and hence the credibility of the U.S. Or do we take his comments as true and that the U.S. economy is stalling and that means stock prices are possibly too high?
What we do know is that the IMF has downgraded its forecast for growth and is now warning things could get worse courtesy of trade tariffs and trade uncertainty caused by the U.S. Oil has entered a bear market and the Saudis need to keep Trump happy so they can get their armaments and for the Royal family to remain in power. And with the plunging oil price comes a lower inflation rate. So there are plenty of reasons to be happy. Well maybe.
The Fed commentary suggests that Powell has moved from the quarterly rate hike to an environment where one more hike may happen in 2019. But this recent increase in rates has been linked to the declines in the housing market as mortgages hit 5%. The probability of a rate hike on the CME now stands at 79.6% for December and 89% in March.
Meanwhile, we have the ECB and the BOJ on a possible collision course as both may look to hike next year. Overnight swap rates are pricing in one 15bp rise for Europe. This seems somewhat optimistic as data is showing a slowdown in Europe.
Manufacturing data from Germany is slowing, Sweden’s economy surprisingly slowed in the third quarter and the lower oil price is hitting the Norwegian economy. The UK must unwind its economy from the EU and with talk now around a “no Brexit”, it’s hard to expect nothing other than a hard landing for the UK economy. It is expected that the BOJ will hike by 10bp in April 2019 to 0%. The global economic outlook is shifting and bonds are indicating a change in the winds.
However, our focus should be for this weekend and the G20 in Buenos Aires Argentina. For most it’s easy to remain sceptical of an outcome because neither side can back down and both must appear as a winner to their supporter base. This will be difficult.
For the U.S. investor there are many things to ponder. The debt ceiling and Trump’s wall loom ever present. Then the mess with Manafort, Cohen and Trump with Mueller remains problematic. Especially if as Cohen has suggested Trump was still ploughing ahead with a Trump Tower in Moscow as late as the lead into the U.S. election. Those issues could still create a political disturbance.
On a separate note, Deutsche Bank’s Frankfurt office was raided by Prosecutors as they try to mount a case against the bank for laundering money. And in China the government has become somewhat startled by the default rates on small loans and is looking to shut down small finance companies. And Jack Ma has now become a member of the Communist Party.
Equities: The S&P 500 fell 0.2%. The Dow fell 0.1%. The Vix closed at 18.95. The Stoxx rose 0.2%.
Currencies: The Bloomberg Dollar Index fell 0.1%, and the yen rose 0.3% and the euro gained 0.2%.
Bonds: The ten-year closed around at 3.028%. The 2-year closed at 2.811% and the 30-year closed at 3.324%. The ten-year bund closed at 0.321% and the OAT closed at 0.696%. The U.S. curve closed on the day with the following closes 2/10 at 21.5 bp, 2/30 at 51.5 bp and the 10/30 closed at 29.6 bp. The U.S. 5-year closed at 2.846%.
Commodities: WTI rose 2.1%. Gold was steady copper fell 0.62%.
Bitcoin is trading around $4,208.
Aussie Market Today.
As the G20 meeting is a binary event one could be a hero or zero. Given the uncertainty offshore, I expect that the ASX will drift and possibly weaken a little. If Asia sets up a strong rally that may be worth following.
Treasuries rallied and I expect bonds on the day to continue. End of month rebalancing should assist the rally. The problem for the Aussie bond market is the inevitable slowdown caused by the drought. Then there are the weather events. The effects will be felt further down the track.
The Aussie dollar was stronger on a weaker dollar. This trend may continue for a little while.
The direction for markets continue to be strongly influenced by Asia. Look north for some guidance.
Geopolitical risks remain high.