There are signs everywhere but how we interpret them is another matter. Stocks fell amidst a slew of corporate earnings which were to be fair a little mixed. However, the news of the day was once again Trump. The trade deal with China remains elusive and especially so now that Trump has criticized China just prior to the next round of negotiations commencing in Shanghai.
To be fair Trump did say he talked with his counterpart later in the day but that was after the stock market had fallen. The sentiment on the stock markets improved after Trumps later comments.
Stocks were mixed, Under Armour reported weak sales and its price tumbled, tech shares stalled and fell. Procter & Gamble rallied on good results.
Trade is the signal for stocks and its trade that stocks are looking for signs. An increase in tensions could see trade slow even further and that could lead to a sharp slowdown in manufacturing. One only has to look to Germany to see what has happened there as trade has slowed. A manufacturing recession would most likely spread to services and this would have a detrimental effect on the global recession and probably lead to a global recession.
The task at present for central banks is not so easy. If the Fed cuts rates as expected, then the administration is further emboldened to continue its call for further rate cuts.
For Europe the issue is Brexit. The pound is tumbling and has just suffered one its larger declines for eight months. The pound declined on the news that Johnson will lead the UK out of the EU no matter what happens. Investors are concerned that such an action will lead to a full-blown recession in the UK.
For fixed income investors their sign will be Wednesday and for the moment the FI market is treading water. Interest rate futures suggest that traders are now positioned for a full rate cut of 25bp and that probability is 78% whilst 22% are looking for a 50 bp rate cut. Fed funds futures are now implying another rate cut later in the year and the possibility of another in 2020.
Amidst all the glum news there remains a surprise. Consumer confidence rose to an eight -month high at 135.7 for July and has recovered from June’s fall which was a 21-month low. The CPI remains subdued at 1.6% with the Fed targeting 2%.
The next 24 or so hours are going to be quite telling for the Fed. Trump has stepped up his attacks on the Fed demanding a large cut. The cut flies with the narrative of trade with China. A big cut would allow Trump to bully China in more concessions as it provides relief for U.S. industry and consumers alike allowing the economy to steady.
For the markets however a 50 bp cut will startle them into a rally and especially so for stocks. Treasuries will rally but they will be limited buy how far you can go.
The dovish attitude by the Fed has been important for the $6tr rally in stocks and for treasuries. Forward guidance for stocks remains positive, however expectations are being scaled back. For analysts they are revising the last three months earnings down form a rise of 6.5% to a rise of only 5.2%.
Equities: The S&P 500 fell 0.26% The Dow fell 0.09%. The Vix closed at 13.94. The Stoxx Europe 600 Index fell 1.5% the biggest decline in 3-months.
Currencies: The euro rose 0.1%. The Bloomberg Dollar Spot Index was flat. The pound fell 0.4%.
Bonds: (as at 4.30pm). The ten-year is trading at 2.06%. The 2-year is trading at 1.848% and the 30-year is at 2.58%. The U.S. curve closed on the day with the following closes 2/10 at 21 bp, 2/30 at 73.2 bp and the 10/30 closed at 52.0 bp. The U.S. 5-year closed at 1.842%. The 2/5 spread is now -0.6 bp. The ten-year bund closed at -0.438% and the British gilt closed at 0.638%. The 10-year yen gilt is trading -0.152%.
Commodities: WTI rose 2.4%. Gold rose 0.3%. Copper fell 1.33%.
Bitcoin is trading around $9,532.
Aussie Market Today.
Stocks to be steady on the day. Expect a slow sluggish market on the day as investors look for inspiration. Inspiration could come in the form of trade news from China.
Bonds to be steady. Local news though could still move the market. Commentaries around the potential loss of 100k of jobs should property slump will keep rate cuts in the news.
Credit remains on the bid and expect further spread contraction.
At least one more rate cut is now expected.
Credit continues to perform.