Chips are up.

Apparently, the relaxation of curbs placed on Huawei has caused stocks to surge. By all accounts, the major tech companies from Broadcomm through to Google have been beating a path to Trump’s office saying how much they stand to lose by not trading with Huawei. And it’s significant. This was something that Mnuchin and Lighthizer appear to have overlooked.

On the day, we saw semiconductors bounce after their 4% sell off the previous day. And that was the first up session in four days. Despite all the volatility, the stock indices are only just below their all-time highs. As such, stocks are still performing. The Nasdaq Composite was up 1.8%. European chipmakers also received a boost with the tech sector up 1.59%. Autos and suppliers pared gains and closed with mere 0.24% gain. The news about Huawei spurred market confidence.

What is important to note throughout the turbulence is that the market appears to be wedded to a single news story. This preoccupation with a story is creating the volatility that we are now seeing take place in the markets. However, at these levels, stocks are fully valued having risen 20% since December.

Defensive staples were down on the day and were the only sector out of the 11 sectors to record a loss. Kohl’s Corp dropped 12% after it cut its full-year profit forecast. And JC Penney fell 7% after it reported falls. On the day, liquidity was tight with lower than average volumes recorded.

With the Huawei news sentiment changed and bonds edged higher in yield. The curve flattened and especially so between 2-year and 5-year bonds. The market is now in a holding pattern waiting to see the next move. As one knows, a reprieve does not mean any progress has been made.

Boston Fed President Eric Rosengren commented that he did not expect the trade issue to require looser monetary policy. The rate cut outlook has changed modestly with a 50% chance of cut priced in for October from an earlier level of 65%. U.S. home sales remain persistently weak with the April data showing home sales fell 0.4%.

The Dutch Government issued a green bond with euro 21.2bio of orders for a euro 6 bio issue. Of the bids, 82.5% came from green real money accounts. Investors that could prove their green credentials could receive an extra 10%. Meaning that as an investor with euro 20 mio, you were given the choice of taking euro 20 mio or receiving an extra euro 2 mio. The bonds were offered at auction. There was no underwriting role for primary dealers. Client bids were placed with the Dutch debt agency. The issue was a 20-year green bond issued at 20-year bund (German benchmark) +18bp or a yield of 0.557%.

The Rant.

When people talk about welfare and subsidies, it is interesting. The Trump administration is considering paying $2 per bushel for soybeans and 4 cents for corn in an effort to offset losses stemming from Trump’s trade war with China. This is part of Trump’s $20 bio welfare package for farmers and offsets some of their losses. It does not make up for loss of market share.

In another interesting farming twist, soybean farmers in Brazil have taken to burning their crops in the event of foreclosure by their creditors. An ambiguous legal system has helped as many farmers have sought bankruptcy. For the traders, they thought they could barter but that’s not the case. It is thought poor management, bad weather and political distractions have exacerbated the problem.

Market Recap.

Equities: The S&P 500 rose 0.85% and the Dow rose 0.77%.  The Vix closed at 14.95 while the Stoxx Europe 600 Index rose 0.5%.

Currencies: The Bloomberg Dollar Index was rose 0.2% while the euro was flat and the pound fell 0.2%.

Bonds: (as at 4.30pm). The ten-year is trading at 2.428%. The 2-year is trading at 2.258% and the 30-year is at 2.845%. The U.S. curve closed on the day with the following closes 2/10 at 16.8 bp, 2/30 at 58.6 bp and the 10/30 closed at 41.6 bp. The U.S. 5-year closed at 2.228% and the 2/5 spread is now -3.2 bp. The ten-year bund closed at -0.063% and the British gilt closed at 1.085%. The 10-year yen gilt is trading -0.047%.

Commodities: WTI fell 0.2% and gold fell 0.2%.

Bitcoin is trading around $8,061.

Aussie Market Today.

Stocks to rally on the day. Offshore markets were strong and without any tweets or comments the stock market should remain that way. Risk for the moment is being taken.

Bonds should continue their rally as comments from Governor Lowe suggest that the economy is spluttering and looks set to ease rates in June. Financial markets have priced in a 91% chance of a cut next month and that number was 50% before Lowe’s speech. The Aussie dollar has fallen in response to the comments.

APRA has relaxed rules relating to how banks stress test customer limits for mortgages. This change is hoped to boost the housing market which has been weak.  Lowe made a point of telling the Government that any delay in tax relief would not be welcomed as many households are heavily indebted and a stimulus is required to boost the economy.

Credit remains on the bid. Demand for credit is strong in the shorter maturities.