NOT ANOTHER REPLAY.

One should be concerned about the behaviour of the Trump Administration at present as Trump appears to be trying to create turmoil to deflect away from the Mueller investigation. And the actions appear desperate.  However, they may not be without consequence and the same also holds for Bibi’s administration in Israel and I am not sure that I would want to be a military person in either country.

Trump has the issue that his personal lawyer Cohen appears to have taken money from a Russian oligarch both prior to Trump’s election and post the election.  And some of that money appears to have found its way towards the payment of hush money to persons such as Stormy Daniels.

This is a problem. Bibi has the issue of corruption charges at home. The issue is that both countries appear to be spoiling for a fight with Iran much to the chagrin of Europe and the Chinese.

Iran is probably not a country that I would necessarily want to spoil for a fight. The Russians no doubt, are selling equipment to Iran in return for oil and the same probably holds for Turkey and many of those belly states of Russia.

Both Iran and North Korea have a model now and know that they can push the U.S.  For North Korea and the pending talks with Trump, this probably means they definitely will keep their nukes. For Trump to say to Iran they will negotiate or else is somewhat of a hollow threat.

Any attempt by the U.S. to attack would lead to significant destabilisation in the Middle East and no doubt would interfere with the U.S. missions in both Iraq and Afghanistan.

Geopolitical tensions are rising and the only country that is trying to hike those tensions is the U.S. Then we have the issue of trade and tariffs. The U.S. continues to try and push China on trade. We do know that this uncertainty is sapping business confidence in the U.S. and at a time as rates are rising and liquidity is falling. The Atlanta Fed president Raphael Bostic has said as much in recent addresses.

The producer price index rose a meagre 0.1% in April easing fears of inflation.  Once again, it highlights the problems within the U.S. economy in that productivity is weak and that geopolitical risks are having an effect in the broader economy. The PPI has now fallen from 3% to 2.6%.

This does take some steam out of the Fed to hike rates in the near future. Core PPI also fell to 2.5% in April which is lower than the 2.9% figure recorded in March. Services saw the biggest decline since 2009. Healthcare costs fell.

Another indicator into the strength of the economy was the Commerce Department’s report on wholesale inventories. Inventories have increased less than estimated with sharp declines in motor vehicles and a range of goods. Stocks rose 0.3% compared to 0.5% in March and 0.9% in February.

Bonds, however, continued their march towards 3% and perhaps turning the tide towards a bearish bond market.  The burgeoning budget deficit and a weakening economy has the market in two minds.

All eyes are now looking closely at the yield curve for clues about a possible looming recession and the need to perhaps ease rates. Such an event would be disastrous for a number of reasons.

The Treasury needs growth at 3% to pay its budget requirements and the Fed is no longer putting money into the system. A fall in economic growth would see an increase requirement of issuance which is already at $1 tr. How the bond market will react to a stalling economy and an increased issuance requirement is anybody’s guess.

To attract necessary capital, the currency will need to weaken, and rates will have to rise and that’s in the perspective of a possible recession where lower rates are used to prime start the economy. Place a tariff war in the picture and the economic outlook looks very blurry.

The Italian / German 10-year bond spread widened to 132.7bp. Meanwhile, mark Carney suggested that BoE may wait until August before the next hike and Portugal’s, Bank of Portugal Chief has left the door open for more bond purchases. The outlook is starting to look a little clouded.

On the day however, the oil market soared 3% on Trump’s comments relating to Iran as those comments have now created uncertainty on the outlook for oil. For the Saudis this is manna from heaven and is good for their Aramco IPO and their stated aim to push oil higher. For the Russians this is also good news.

The MSCI for some 47 countries rose some 0.61% today. The Dow rose 0.75% and the S&P was up almost 1%.

In an unusual move, there was no flight to gold purchases. Gold remained flat on the day.

 

Recap. 

Equities: The S&P 500 closed up 0.97% The Dow rose 0.75%. The Stoxx gained 0.63%.

Currencies: The Bloomberg Dollar Index was flat.

Bonds: The ten-year closed around at 3.006%. The 2-year closed at 2.53% and the 30-year closed at 3.16%. The ten-year bund closed at 0.559% and the UK gilt closed at 1.46% and the OAT closed at 0.796%. The U.S. curve closed the day with the following closes 2/10 at 47 bp, 2/30 at 62.8 bp and the 10/30, closed at 15.6 bp. The U.S. 5-year closed at 2.841%.

Commodities: WTI rose 3.16%.  Gold fell 0.07% and copper rose 0.1%.

Bitcoin is trading around $9,250

 

Aussie Market Today.

The Aussie market should see equities continue to rally despite increasing geopolitical risks.

Bonds will weaken marginally. Pay attention to any commentary around trade talks between China and the U.S. as these talks are likely to be the main driver for asset prices in the short term.  Discussions between the U.S. and China are due for next week.   However, they may be brought forward.