Now that red October is finished and the red sea has vanished, stock markets in the true tradition of risk off charged ahead and rallied. Stocks rose and the crowd cheered, what can go wrong? The dollar fell, oil collapsed and reported earnings are good. The stock rally over the past three days is the best rally for two years and all this encouragement and all this optimism stems from one little tweet from Trump claiming progress in trade negotiations.
The upbeat tone to today’s market is all down to both Trump and Xi Jinping expressing optimism about resolving their trade dispute. Talks are currently underway and both have a lot at stake. For the GOP, with mid-terms next week an announcement of some form would be welcome. This all comes amidst the backdrop of the U.S. accusing China of stealing microchip technology from Micron. It’s all about the politics. Both leaders need a win of sorts.
All is forgotten, all is forgiven and all our fears are past. Bonds rallied because manufacturing data was weaker than expected and Friday we have the jobs report and that report will be the litmus test as to whether the Fed hikes in December or not.
There is concern that productivity has slipped and that slippage could leak into the jobs data. The ISM came in at 57.7 from the previous month of 59.8. There is a belief that momentum is slowing and that has contributed to the small rally. If the report were to highlight a jump in wages then that could set the bond market off again in a bear run.
The S&P Materials Index was up 3%, technology was up 1.2% and the Dow was up 1.06%. Trade sensitive companies enjoyed the rally with Boeing and Caterpillar leading the gains.
The story was similar across the pond. The Stoxx along with various bourses rallied and bonds sold. Risk off trades were the order of the day, and even the bears only shed a little red. Brexit negotiations were the driver for Europe.
News that some UK financial institutions would have some form of access to European markets turned the risk off trades on. The news was later played down but it was all too late Sterling had rallied 1%, 10-year bunds jumped to 0.42% before closing around 0.399%, and the Stoxx hit a two week high.
Strong earnings allowed a relieved market some space to rally. For Europe though the only way now for the bond market is up, up in yield. Inflation is returning and the ECB is winding back its buying programme. European bonds were helped earlier because of extension reweighting to bond indices due to maturities. This helped bonds to rally or hold steady.
Importantly the Libor rate rose 2.3 basis points to 2.5185%, the highest level since October 2008. And the rise was one of the largest movements since the 2.6 bp rise March 20.
For commodities the game of substitution is in full swing and it’s all to try and bypass tariffs. U.S. soybean shipments are being diverted mid shipment, China is sending alumina to Iceland and India and slashed scrap copper imports from the U.S.
Oil fell on concerns that global growth is weakening at a time when output from the major producers is surging. China’s purchases of oil from Iran has fallen 34% ahead of U.S. sanctions on Iran being imposed.
And Trump is pressuring Venezuelan gold exports though sanctions.
Equities: The S&P rose 1.06% and the Dow rose 1.06% The Stoxx raced ahead and gained 0.4%. The Vix closed at 19.34 and the MSCI All-Country Index was up 1.1%
Currencies: The Bloomberg Dollar Index fell 0.8% while the yen rose 0.2% and the euro rose 0.9%.
Bonds: The ten-year closed around at 3.14%. The 2-year closed at 2.8465% and the 30-year closed at 3.377%. The ten-year bund closed at 0.399% and the OAT closed at 0.759%. The U.S. curve closed on the day with the following closes 2/10 at 28.1 bp, 2/30 at 52.5 bp and the 10/30 closed at 24.1 bp. The U.S. 5-year closed at 2.96%.
Commodities: WTI fell 2.8% while Gold jumped 1.7%.
Bitcoin is trading around $6,303.
Aussie Market Today.
Equities to rally its risk off until we find something else to fret about. Jobs report tonight and that could change things. However, the skew is towards the numbers slowing and that could mean the Fed does not hike in December. That’s good for equities. If the numbers are strong then the gains will slow.
Risk off so bonds will weaken. The direction out of Europe and the U.S. is weaker for bonds. However, watch for news as this narrative can rapidly change. Bonds are now back to being data dependent so any reaction will be as a result of the data. This makes things tricky.
Trade talks of course will drive the narrative and direction and we know Trump needs a political win so beware the tweet, as that could rapidly change sentiment. With the mid-terms next week I expect bonds to weaken as Trump does his best to reinvigorate the equity market. Good luck.