Oh my gosh, yesterday was a day of irony and today is a day of giving. And stocks got plenty. Tariffs were on the agenda and China signaled it may cut tariffs on auto imports whilst it negotiates with the U.S. China agreed to reduce tariffs on U.S. cars from 40% to 15%. This was just the tonic stocks needed on a day that could have turned out bad. On the day, stocks finished barely negative.
Today, Trump was at his best. He railed, he bullied, he snapped, he argued, he ranted. And all in front of the cameras whilst meeting with the Democrats leaders. It was truly a show. Trump said he would be proud to bring about a government shutdown over his Wall. It was pure theatre aimed at his mid-west supporter base.
The hawks in the GOP became extinct when Trump became President. As for the rest of us, a Government shutdown is not a desirable outcome. The Wall probably will never be built and is one of Trump’s great lies but it’s great politically.
The tariff news brought solace. For stock traders now getting used to being whipsawed, some good news was welcome news. Tuesday saw gains as much as 1.4% and falls as much as 0.6%. The good news is that stocks rallied. But be wary, some of that rally traces back to the idea that the Fed won’t be tightening in 2019 as quickly. That premise loses ground if business cannot increase revenues and profits stall if the economy slows, as most analysts are now predicting.
For bond investors, the day was a quiet day. Volumes were thin, a respite from the helter skelter buying of the past few weeks. There is a healthy scepticism in the bond market now and it remains to be seen whether the 10-year can even climb back to 3.25% let alone move higher.
Bonds look much more likely to edge their way to 3%, especially given the change in sentiment. The futures market has the probability of a rate hike in 2019 at around 50:50 and the economy looks to be slowing. The caveats for lower bond rates are a further blowout in the already bloated budget deficit and a possible downgrade (unlikely but should happen given the data). Meanwhile, the lower interest rates are capping interest costs for the Government at the moment.
On the day, however, the 3-year auction was well received, with the offering priced at 2.748%, and with a bid to cover ratio of 2.59. The U.S. producer price index was a little higher than expected with the index inching higher by 0.1%. Analysts had been expecting a flat result. Wednesday will see the $24 billion of 10-years auctioned. Demand is expected for the bonds.
In Europe, Theresa May is heading off to Brussels to put forward a new Brexit Deal. I am not sure how that works after a deal has been reached, well, sort of. The UK is currently shambolic and May is fighting hard to keep her party’s confidence.
Meanwhile, the Stoxx 600 climbed the most in six weeks, and the ECB is set to cap purchases at its final policy meeting of 2018 on Thursday. Bunds held steady today despite the surge in the Stoxx 600. It would appear as though the Europeans are preparing for some unknown.
For Europeans investing in the U.S., the recent movements in the curve have been causing investors to reconsider investing. The cost of hedging is making U.S. bonds unpalatable and probably explains to some degree the rampant bullish results in European bonds. As short-term rates rise, the cost of hedging rises.
For yen-based investors, the cost of hedging is now 3.3% on their principal investment.
Equities: The S&P 500 was flat -0.04% while the Dow fell 0.22%. The Vix closed at 21.76 while the Stoxx rose 1.5%
Currencies: The Bloomberg Dollar Index rose 0.1% while the euro fell 0.3%.
Bonds: (as at 4.30pm). The ten-year is trading at 2.879%. The 2-year is trading at 2.764% and the 30-year is at 3.121%. The ten-year bund closed at 0.233% and the OAT closed at 0.712%. The U.S. curve closed on the day with the following closes 2/10 at 11.1bp, 2/30 at 35.5bp and the 10/30 closed at 24.2bp. The U.S. 5-year closed at 2.739% while the 10-year yen gilt is trading at 0.047%.
Commodities: WTI rose 1.4% while gold fell 0.1% and copper rose 1.71% (Nymex Jan contract).
Bitcoin is trading around $3,368.
Aussie Market Today.
Bonds are in a holding pattern, expect a little drift. Bonds will probably retreat a little and that may present as a reasonable buying opportunity. Watch for signs of change in U.S. Treasuries trading in Tokyo. Otherwise, it could be a long day.
The Aussie dollar was weak as commodities slumped and king dollar was strong.