The Ebb and Flow of Markets.

All-time highs for equities but will markets become unnerved?

It is a pity markets are now closed as it will be interesting to see how they react now that two people close to Trump are facing lengthy sentences. Manafort has been convicted and now looking towards a plea deal and Cohen has been convicted on 8 charges. All on a day when equities hit all-time highs and sentiment was high. Whether the markets become unnerved only time will tell and whether there is a drift to safe haven assets then we may know that answer shortly.

The trials for the moment have counted for little market interest, what has been of interest is the pending talks with the Chinese trade delegation. A lot of optimism is riding on a positive outcome. The S&P 500 Index capped four days of gains and the dollar weakened. Ten-year treasuries rose.

Sentiment is driving the market not conviction and therein lies problem. Nervousness can be realised very quickly and that change in sentiment could change markets rapidly. And what could be a signal for the bullrun in equities to continue, junk bonds saw strong demand with almost $86 million moving into Barclays Short Term High Yield ETF and that buying was nearly double the normal days volume.

The bond markets are hedging their bets on Powell’s speech in Jackson Hole with many believing that Powell will hold rates steady and his pledge to do what’s best for America first. Then there is the problem the Fed has with the two curves. The yield curve and the Phillips curve.

Both have different consequences and a devotee of either will have the Fed tightening or holding steady or easing. Such is the divergence in view. The Phillips curve suggests that as employment grows, inflation rises therefore tighten, whilst an inverted yield curve suggests the economy is struggling and therefore rates should remain steady or fall. Both miss the point.

Productivity in the U.S. remains steadfastly weak and the spend on capex poor with most coming in the tech sector. The inverted curve may also be a combination of buyers in a cramped investment market looking for bond yields that are high.

The long end of the U.S. market compared to Germany is massively high. Think 0.3% versus 2.84%. If I were German, then the U.S. optically looks attractive. The QE by the big 4 has distorted markets and as such it is hard to get a real understanding of what is driving markets.

U.S. bond yields either way look likely to steepen first before flattening simply because the ballooning deficit and issuance by the Treasury has to be funded and after a while investors become leery. Once rates rise, the economy is likely to slow and then the curve can flatten and provide a signal.

Meanwhile, Trump is signalling his displeasure with the Fed and Powell’s insistence on hiking rates. The dollar fell after Trump made his remarks.

Italian bonds (BTP’s) rallied after Moody’s held steady the country’s rating. The 10-year fell below 3% and that’s the first time since August 10.

One point to ponder is the growing sentiment that the U.S. is looking to use the dollar as a weapon. This has led to a number of countries looking for alternatives. Iran, Russia and Turkey come to mind. The need is also lessened with Trump isolating his allies.

What we have seen is the share of FX reserves held in dollars falling since Trump became President. About 88% of all FX trades use dollars (BIS). The pushback is gathering momentum with both Russian and China leading the charge. Changes won’t happen quickly but the dollar as a reserve is becoming increasingly vulnerable.

Market Recap.

Equities: The S&P rose 0.21%, the Dow rose .35% and the Stoxx 600 rose 0.2% while the Vix closed 12.86.

Currencies: The Bloomberg Dollar Index fell 0.4% and the yen fell 0.3% while the euro surged 0.8%.

Bonds: The ten-year closed around at 2.842%. The 2-year closed at 2.608% and the 30-year closed at 3.002%. The ten-year bund closed at 0.329% and the UK gilt closed at 1.266% and the OAT closed at 0.67%.

The U.S. curve closed the day with the following closes 2/10 at 23.0 bp, 2/30 at 39.2 bp and the 10/30 closed at 16. bp. The U.S. 5-year closed at 2.726%.

Commodities: WTI rose 1.3% and Gold rose 0.3% while LME Copper gained 0.9%.

Bitcoin is trading around $6,467.

Aussie Market Today.
This is risk off day and as such expect the equity market to rally until the trade talks when there could possibly be disappointment.

Bonds are a little weaker offshore so probably expect some upward drift in yield.

Geopolitical risks remain high.