On a day with not much news the equity market rallied with the Dow having its best day since April. Bonds sold off marginally. Commodities rallied and this was all in a relatively thin market.
So, what was the root cause? Could it have been Trump acting Presidential for once? Could it be the global story? Or was it something else called an opportunity? Perhaps it was all three. Bonds are waiting for the Jackson Hole gabfest to begin Thursday. Equities rallied perhaps on an opportunistic basis. Mitch McConnell boasts that he can raise the debt ceiling with no strings attached and Mnuchin thinks he has no chance of failure on his tax plan. Trump has reinstated his belief for “The Wall” and equity markets have become somewhat raptured with the possibilities.
The world growth story is a positive. The easing political tensions is a positive but some real hard work has to be done to get any passage of Bills passed in both Congress and the Senate. In the meantime, the equity market may be just a little ahead of itself. Expectations are blind faith and with valuations already stretched. Any hiccup in the passage of the appropriate Bills may cause disruption.
A lot is otherwise resting on the Jackson Hole Conference. Draghi is expected to make an announcement relating to the paring back of bond purchases. In addition, Yellen is expected to contribute and broaden the discussion of how the Fed intends to pare back on its bond purchases.
It is interesting to note that in all the discussions about rates, that banks in the U.S. have the highest weighting to assets over 5 years since 1984. Currently the assets above 5 years in maturity comprise about 27% of banks loans. This would suggest that in the current economic conditions and interest rate environment the banks believe rates will be steady to slightly higher for some time yet.
Equity markets globally rallied. This is a sign of improving economic growth not just in the U.S. but elsewhere in Europe and Asia. The MSCI’s all country Index rose 0.69%. The Dow climbed 196.14 points or 0.9%. The U.S. indices were assisted by healthcare and materials. The Dax rose 1.4% and the Stoxx 600 rose 0.8%
Ray Dalio continues to spruik safety first on his Linked In page suggesting that one should be taking some risk off.
Bonds: The movements higher in yield were more limited to the U.S. Rates in Europe were pretty steady with the 10-year benchmarks closing around yesterday’s levels. The gilts closed at 1.08%, the bunds at 0.395% and the OAT at 0.697%. The U.S. bonds were marginally weaker. The 2-year note widened 2 bp to close at 1.326%, the 10-year closed at 2.217% up about 2 bp and the 30-year closed at 2.789% out about 2 bp. The curve was steady. Investors remain focused on the Jackson Hole Conference and will no doubt wait until Draghi and Yellen have delivered their speeches before reacting. The probability of a rate hike by December 2017 is now about 29%.
Commodities were strong on the day. Oil was buoyed by falling U.S. inventory and rose 0.6%. Oil may yet climb further as U.S. Gulf Coast refiners brace for a major tropical storm. Gold fell 0.43%. Copper rose to its highest level since November 2014 to close at $6,624.50 a tonne to ease back unchanged from the previous day. Nickel rallied 1.2%, on the back of increased production of stainless steel by Chinese producers.
Aussie Market Today
Ahead of the gala Jackson Hole gabfest, bonds are likely to drift higher in yield (lower in price) and equities should continue the rally.