For the markets, the prospect of tariffs once again raised its head. The equity indices were on track towards hitting a new high and 5 days of positive increases (not seen since February) only to roll over towards the close and finish slightly weaker. The reasons for the fall included tariffs, the fall in oil and Trump’s rhetoric.
The tit for tat tariff spat with China reappeared with the rhetoric increasing partly as a veiled threat relating to oil purchases from Iran, (China is Iran’s largest oil customer) and partly because China feels it is being bullied by the U.S. Either way China will slap about $16 bio on U.S. goods. The Chinese tariff list has been revised since it was first announced and includes medical equipment, crude and LNG. To date, China now has $116 bio of tariffs imposed on U.S. goods.
Oil fell after Chinese data indicated that the demand for oil was slowing. Oil fell $2.23 on Chinese concerns. The fall in Chinese demand was attributed to falling demand from the so called teapot refiners.The European Bourse slumped on concerns over China and disappointing pharmaceutical results. For the Dow, the trade sensitive industrials, such as Caterpillar and Boeing led the slide.
Bonds held up over the day. The 10-year auction saw demand. Richmond Fed Reserve member and Fed member Thomas Barkin commented today that rates should increase and that the U.S. economy was robust enough to warrant a rate increase. Barkin supports gradual increases in rates.
The fall in various volatility indices is causing concern for some market participants. The S&P 500 Vix hit 10.5 this week even though trade tensions are accelerating. The net short position in 10-year U.S. treasuries are at the highest level since 2010 and close to a record high. Net long dollar bets are at the highest since May last year.
Meanwhile, the correlation junkies have something to ponder. The daily standard deviation of the dollars trading range is the lowest for the year and is rapidly closing on a historical low level. The elastic band is stretching and at some point the markets should return to something resembling normal.
The day saw reasonable demand for credit in what was a fairly quiet day despite the 10-year auction. Approximately $6.6bio was issued into the primary market with the $750 mio perpetual issued by BNP seeing demand. Demand for the perp was 11.5 times oversubscribed. Credit over the year for IG offerings is 16 bp wider. (IFR)
And for the crypto junkies, the prices collapsed as a result in a fall in bitcoin from what appears to be drifting confidence.
Equities: The S&P fell 0.03%, The Dow fell 0.18% and the Stoxx 600 fell 0.2% while Vix closed 10.93.
Currencies: The Bloomberg Dollar Index fell 0.1% and the euro rose 0.1%.
Bonds: The ten-year closed around at 2.964%. The 2-year closed at 2.67% and the 30-year closed at 3.11%. The ten-year bund closed at 0.398% and the UK gilt closed at 1.314% and the OAT closed at 0.731%. The U.S. curve closed the day with the following closes 2/10 at 28.6bp, 2/30 at 43.6 bp and the 10/30 closed at 14.8 bp. The U.S. 5-year closed at 2.835%.
Commodities: WTI fell 3.4% while Gold rose 0.2%. The Bloomberg Commodity Index fell 0.4%.
Bitcoin is trading around $6733.