Today was just yet another day in a litany of truths and half-truths. The much-vaunted talks between Trump and Kim Jong-un have ground to a halt and seem unlikely to proceed anytime soon. The shock of the news caused markets to pause and once again the day descended into a risk off day.
The stalled talks come at a time when trade discussions between the U.S. and China also appear to be stalling. In the meantime, in an attempt to try and rally the U.S. allies, Trump has signalled he is willing to bully those allies by threatening to impose tariffs on their auto and truck manufacturers. In Europe today, those manufacturers suffered declines in their share price.
The threat of tariffs to be imposed on the U.S. allies in Europe has seen the economy slow notably. German economic growth has slowed. Growth was seen in construction, company investments and household spending. Exports slumped. The preliminary reading has growth in the first quarter up 0.3% with yoy growth set at 2.3%. Exports fell 1% and imports fell 1.1%.
Crude fell as a result of the Russians suggesting that OPEC was phasing out supply curbs. A fall in the oil price would affect the price the Saudis receive for the part sale of ARAMCO, the Saudi Oil giant, given the curbing of production is linked to the sale.
With political risk on again, bonds have become the attractive investment for the moment. Treasury yields plunged on the day. The auction of 7-year notes was met with strong demand on the day. The bid to cover was 2.62. The other factor that is spurring demand for bonds was noted in the Fed Minutes, when the Fed indicated that it would be likely to hike rates only two more times, not the three times the market expected.
The ECB remains on track to end its bond buying programme later this year despite slowing European growth. To date, the ECB has spent 2.5 tr euros buying bonds and trying to push inflation through 2% and has been largely unsuccessful in that task. Inflation remains firmly rooted in many ways similar to the U.S.
On the day, the 10-year bund fell 4bp to close at 0.46% – the lowest since January 11. Meanwhile, the Italian 10 year is now trading at 2.4% – close to its 14-month high.
So on balance, the day was a risk off day in just another day of risk off days. Nothing unusual nothing strange – it was just another day!
Equities: The S&P 500 fell 0.2% The Dow fell 0.3%. The Stoxx fell 0.5%
Currencies: The Bloomberg Dollar Index fell about 0.1%. The euro rose 0.2% and the yen rose 0.7%.
Bonds: The ten-year closed around at 2.977%. The 2-year closed at 2.51% and the 30-year closed at 3.127%. The ten-year bund closed at 0.47% and the UK gilt closed at 1.397% and the OAT closed at 0.758%.
The U.S. curve closed the day with the following closes 2/10 at 46.5 bp, 2/30 at 61.3 bp and the 10/30 closed at 14.6 bp. The U.S. 5-year closed at 2.814%.
Commodities: WTI rose fell 1.7% and Gold rose rose 0.9%
Bitcoin is trading around $7538. The DOJ is investigating trading activity in various cryptocurrencies.
Aussie Market Today.
Equity markets should trade a little weaker on the day. However, watch the news headlines. Geopolitical news will determine the day’s outcome. I expect that with week ending and given the market has been sluggish that we may see a small rally.
The U.S. equity markets still remain in good shape and this means that on balance equities will improve over time.
Bonds have had a good week. Expect some squaring. The risk off trade for the moment is transitory and that will drive expectations. Any breakdown in talks between China and the U.S. with the net result of tariffs being imposed will see bonds rally.