Markets are currently showing a great ability to absorb shocks. The shocks are often associated with an unsystematic risk and currently, the main source is geopolitical.
As those risks abate, a new shock comes along and the market adjusts either as risk off or risk on and moves on. This is all rather curious as markets seem quite happy to momentarily stall and then launch again as if the next movement was preordained.
Over the last weeks, we have contended with the drama of Italy, the change in Spain, tariff spats between the U.S. and everybody except Australia (because the flat-earthers believe Australia does not exist and are a formidable voting bloc in the U.S.).
The equity market was running hot today, especially for financials, until the last hour or so when it was observed that 10-year bonds, instead of cracking the 3% barrier, were heading towards 2.90% and this was not so good for banks.
Turkey and Brazil played their part on the day by causing some minor discomfort. But most investors were happy to dismiss the problems caused by these two countries.
G7 talks loom large as do the pending meetings for both the Fed and ECB. The ECB is expected to announce a curbing of QT and the Fed is expected to hike rates. The G7 meetings appear to be more confused than chickens in a chicken coop.
The various parties, except for the U.S., are somewhat confused and unsure just what it is that the U.S. hopes to gain from the talks. Meanwhile, some of the data out of Europe especially out of Germany is demonstrating how this trade uncertainty is biting by showing falls in exports.
For bonds, the day appeared to be firmly in the hands of the bears. The bears were having a great day selling to hapless funds who were getting longer. That all changed in a brief two minute period late in the day via the futures market.
Over the past week or so the shorts had steadily grown, and they were suddenly being squeezed. The 10-year fell 9 bp between 1.33 pm and 1.36 pm New York Time with more than 100,000 contracts changing hands during that 3-minute period.
What caused the buying frenzy is anybody’s guess. A fat finger is cited as one possible culprit. Looming trade talks going badly another. And slumping emerging markets another. There was no consensus of opinion. However, the rally did send a shock through markets.
And in an “I told you so” moment, Putin has told Europe that he warned them years ago about the risk of the U.S. imposing its rules on others and they were now paying the price for ignoring his comments.
Equities: The S&P 500 fell 0.2%. The Dow rose 0.2%
Currencies: The Bloomberg Dollar Index fell 0.3% The euro gained 0.2% and the yen rose 0.5%
Bonds: The ten-year closed around at 2.90%. The 2-year closed at 2.49% and the 30-year closed at 3.07%. The ten-year bund closed at 0.491% and the UK gilt closed at 1.41% and the OAT closed at 0.833%.
The U.S. curve closed the day with the following closes 2/10 at 43.2 bp, 2/30 at 57.6 bp and the 10/30 closed at 14.6 bp. The U.S. 5-year closed at 2.77%.
Commodities: WTI rose1.4% and gold rose 0.1%.
Bitcoin is trading around $7656.
Aussie Market Today.
The Aussie market will likely see bond buying as a result of offshore purchases. The equity market to be steady ahead of the weekend.