What tariffs? It seems even if you administer a tariff at present, it’s not a tariff. If that’s so, why are markets so fearful? The equity market rallied today and the bond market drifted higher in yield. Why?
Simply put, even though Trump has said he will impose $200 bio of goods, the tariffs are to be at a rate of 10%, not the earlier threatened 25%. And the same can be said for the Chinese. The Chinese threatened a deeper set of retaliatory action but tariffs on $60 bio of goods suggest that the Chinese may be willing to strike a deal sooner rather than later. And that is pretty much why equity markets rallied. All hope has not been lost just yet. The Tech sector led the equity market higher.
JP Morgan was once again playing Debbie Downer for equities. The JPM strategist is concerned that equity valuations are being stretched too far and that benefits of Trump’s tax cuts have now been fully factored in. The argument goes something like the benefits are of diminishing returns. However, markets other than the U.S. may present better returns. JPM (Marko Kalanovic) is suggesting that a global approach will lead to better returns and favours emerging markets. Institutions have been de-weighting for some time in the U.S. with much of the buying of ETFs and by ETFs stemming from retail customers (mums and dads).
European bonds drifted higher in yield. Partly in response to easier tariffs and a weaker treasury market, bonds traded weaker. BTPs rallied some 15 bp (2-year and 5-year yields) in response to growing optimism that Italy’s coalition will respect EU rules and apply some fiscal discipline.
For those chartists in bonds, the 10-year treasury is now forming a triple top and this is starting to cause some angst with traders. Heavy corporate bond supply was another factor in today’s weakness. Corporate supply this week is about $25 bio after about $ 80 bio of sales. Some issuers include GM, Toyota, and Nestle.
With the escalating trade tensions, one of the great myths looks like it may be unwinding. For the past 15 years, Treasury has expected the mounting holdings of Chinese ownership of U.S. Treasuries will continue. That may not be the case as trade tensions escalate. The U.S. Treasury market is now $15.7 tr, so any major selling is not expected to move the needle too far.
However, there is the expectation and there is the reality. An expected shift by the Chinese is not expected to cause too much damage, with some suggesting that a complete sale of 10-years by the Chinese would equate to about 60bp up in yield. Painful but not damaging. Perhaps that’s happening now with a slight reduction in holdings in July from $1.179 tr to $1.171 tr, small change in the scheme of things. And besides, the Chinese economy is in a very different place to where it was when it first started buying treasuries. Japanese holdings have been relatively stable. However, they too remain as net sellers.
Emerging markets suffered again with the Turkish lira falling once again. Oil rebounded after the Saudi’s expressed comfort with a Brent at $80. The Saudis are delighting in the sanctions on Iran and look set to benefit.
Equities: The S&P rose 0.5%. The Dow rose 0.71%. The Stoxx 600 rose 0.1% while the Vix closed at 12.79.
Currencies: The Bloomberg Dollar Index rose 0.1% while the euro fell 0.1%.
Bonds: The ten-year closed around at 3.057%. The 2-year closed at 2.807% and the 30-year closed at 3.202%. The ten-year bund closed at 0.4811% and the OAT closed at 0.79%. The U.S. curve closed on the day with the following closes 2/10 at 25.2 bp, 2/30 at 39.8 bp and the 10/30 closed at 14.4 bp. The U.S. 5-year closed at 2.946%.
Commodities: WTI rose 1.3% while Gold fell 0.2% and copper rose 2.4%.
Bitcoin is trading around $6,327.
Aussie Market Today.
Equities should be in for a strong day. Equities had a good rally overnight and the fear of tariffs appears to have dissipated.
Bonds are in for some seriously stormy weather. U.S. Treasuries were smashed last night and especially so the 30-year. Sentiment may be waning as yields back up. Expect a short covering move at some point. However, expect bond yields to rise. Credit will remain tightish as demand and higher yields should prompt solid levels of institutional interest.
The Aussie dollar improved as the tone for commodities improved.
Geopolitical risks remain high.