The markets opened with a soft tone. However, all that pessimism was quickly dismissed after Trump took a step back on his tariff policy. It appears as though Trump favours Mnuchin’s model as opposed to Navarro’s model and will allow Chinese investment after those investors have been scrutinised. This is a big step back from his weekend position.
For markets, this was the moment that they were looking for and the equity market limped along to post an up day. For the bond market, the comments did little to assuage any trade war fears and bonds were steady on the day.
With all the noise around trade, it is of little surprise that consumer confidence in June fell to 126.4 from a revised 128.8 in May. House prices rose 6.6% for April. Interestingly, the Conference Board survey showed the percentage of consumers expecting an improvement in income fell 18.8% in June from 21.4% in May.
The tariff spat is starting to point towards concerns about growth. Emerging markets are vulnerable. And the Chinese market looks set to head into a bear market if we don’t see a recovery shortly.
There is a maxim that credit leads equity. And in high-grade indices, we are starting to see the effect of duration with returns falling as rates increase.
As the economic cycle matures, equity gains are made through higher debt leverage. Company debt in the U.S. is increasing faster than income growth. In 2007, non-financial corporate debt was $3.35tr or 23% of GDP. In 2016, that had ballooned to $5.8tr or 31% of GDP. And today that nominal pile is over $6 tr.
Long-term corporate leverage is now above the 20-year leverage. This is all coming at a time when Trump wants to force a trade war and when major central banks are about to stop QE or, like the Fed, have ceased QE and are raising rates.
Of concern is the weakening Chinese equity market. The Composite Index fell a further 0.5% Tuesday and is now down about 12%. The Shanghai Composite Index is down 8.1% for the month. Part of the selloff is connected to the deleveraging and risk reduction of the financial system. Losses accelerated as a result of Trump imposing tariffs.
Equities: The S&P rose 0.2% and the Dow rose 0.1% while the Stoxx 600 rose 0.1%.
Currencies: The Bloomberg Dollar Index rose 0.3% while the euro fell 0.1%.
Bonds: The ten-year closed around at 2.88%. The 2-year closed at 2.53% and the 30-year closed at 3.024%. The ten-year bund closed at 0.338% and the UK gilt closed at 1.301% and the OAT closed at 0.68%.
The U.S. curve closed the day with the following closes 2/10 at 34 bp, 2/30 at 48.8 bp and the 10/30 closed at 14.7 bp. The U.S. 5-year closed at 2.746%.
Commodities: Brent rose 2.3%, WTI rose 3.5% after comments suggested the U.S. was looking for its allies to halt imports of Iranian oil. Gold fell 0.6%.
Bitcoin is trading around $6,187.
Aussie Market Today.
The Aussie should be steady. Today appears to be a risk-off day. However, watch for comments as the mood could change rapidly.
Geopolitical risks remain high.