Waiting for yoouu Mr Trump.

In a game of dare, he who blinks first loses. Both China and the U.S. appear to be playing a hard game of dare. However, for the stock market and other markets, the participants are hoping for someone to blink so a resolution can be achieved. Meanwhile, the clock is ticking down to tariff time. Break it down. At 12.01 a.m. Friday tariffs are imposed and risk assets may become not so loved.

Stocks were headed towards a dreadful day until Trump said that he had received a beautiful letter from President Xi Jinping. The markets were looking dire up until that point with stocks down almost 1.5% and the recessionary signal, 3-month bills versus 10-year treasuries turned negative.

Chinese equities were being dumped by foreigners it was looking bad. Wednesday’s signal of the bearish close was certainly evident today. However, given the selloff and the potential for damage to markets, the price action remains solid. Markets are still expecting a result.

And if the increased attention on tariffs was not enough, North Korea was testing ballistics and Iran was unsettling its trading partners to the extent that France has discussed reimposing sanctions. The U.S. has recently imposed bans on Iranian metals in an attempt to slow Iran’s weapon production. The U.S. also seized a North Korean vessel purportedly carrying coal.

Stocks on the day slumped. Chipmakers were under pressure with Intel falling 5.3%. Materials and Technology stocks were the most affected and the sectors fell 0.8% and 0.7%, respectively. The Philadelphia semiconductor index fell 1.2%. Shares in Boeing slumped 1% and 3M Co fell 1.9%.

In other words, those companies that derived Chinese revenues were sold. The VIX continues to climb reflecting traders’ anxieties. Volumes on the day were good with 7.75 bio shares being exchanged compared to the 20-day moving average of 6.83 bio.

The 30-year auction, the final leg of refunding, was met with mediocre demand although the bid was stronger than the previous day’s 10-year auction. Wild price swings and uncertainty have caused investors to be cautious. The bid ratio was 2. The weakest read since January.

The big concern is that China and the U.S. fail to agree on tariffs which in turn would hurt business profits. Bond investors don’t see an outcome being reached Friday and the unravelling could continue further. For investors, it will be a bumpy ride.

The Atlanta Fed President Raphael Bostic has thrown his hat into the ring and raised concerns that increasing tariffs will impact on the end consumers with business unlikely to cover the increase as a result of new tariffs. Bostic is cautioning that the economy may be reaching a point where price pressures push inflation higher. That rise won’t be from wages but rather from goods.

The Rant

The number that many traders are watching is the ISM Index. In April, the index fell to 52.8 and is only just above 50, a level seen as a signal that the economy is in contraction. Since August 2018, the index has been falling.  What the index is pointing towards is inventories are increasing production and employment are growing more slowly pointing towards slower growth.

In more recent times the ISM Index has hit mid-cycle troughs at 48.9 (Nov 2012), and 47.8 (Jan 2016) and previously 46.8 (Dec 1998) and 45.6(Feb 1996). A mid-cycle slowdown has in the past been a trigger to cut rates. (With one exception,  in 1980 rates rose). At the current rate of decline, the ISM is likely to be sub 50 by the end of third quarter. If we don’t get a boost as a result of a comprehensive trade agreement, then expect a rate cut. The Fed is watching the ISM, the bond curve is screaming that there may be problems and a rate cut may be necessary insurance to avoid a recession.
It all hinges on a trade outcome.

If we are looking at reading the tea leaves associated with the trade war with China, then perhaps one should be looking at the WeChat Platform and view an account Taoran Notes. Taoran appears to provide the U.S. with a salient commentary on how to negotiate and such is the influence of the account, the People’s Daily printed its advice.

The bottom line is that the U.S. was told not to fantasise about China making concessions that will damage China’s own interests. The account has been following Sino- U.S. trade relations since October 2018 and has made some prophetic calls. One call in March, that both sides argued for two hours over a word in the preparation of a documents, suggests that there is more to this account than meets the eye.

Market Recap.

Equities: The S&P 500 fell -0.30%. The Dow fell 0.54%.  The Vix closed at 19.10. The Stoxx Europe 600 Index fell 1.7%.

Currencies: The Bloomberg Dollar Index was flat. The euro rose 0.2%.

Bonds: (as at 4.30pm). The ten-year is trading at 2.453%. The 2-year is trading at 2.266% and the 30-year is at 2.869%. The U.S. curve closed on the day with the following closes 2/10 at 18.2 bp, 2/30 at 59.9 bp and the 10/30 closed at 41.5 bp. The U.S. 5-year closed at 2.253%. The 2/5 spread is now -1.7 bp. The ten-year bund closed at -0.047% and the British gilt closed at 1.121%. The 10-year yen gilt is trading -0.049%.

Commodities: WTI fell 0.9%. Gold rose 0.2%. Copper fell 0.3%.

Bitcoin is trading around $6,092.

Aussie Market Today.

Equities appear to be weaker on the day. Offshore, selling continues and with investors selling Chinese equities ahead of the Friday tariff deadline one suspects that it will be difficult for stocks to rally unless there is some agreement reached concerning trade. Being a Friday and with a lot hinging overnight today feels like a risk off day.

Bonds look likely to continue to rally. The day feels like a risk off day and that is good for bonds. Trade is the all-important call but that’s outside of trading hours, so I don’t expect the market to get too carried away. Expect a small rally. Credit is wider and that appears to be the trend as credit is following the weaker equity market. This may be a good time to buy. However, if we don’t get a resolution, spreads could widen further. Use the opportunities to buy into weakness if you can.