The Garden of Good and Bad.

The good news is that the Fed cut rates by 25bp. The bad news is that the Fed cut rates by 25 bp. Markets were looking for a rate cut of at least 25bp and were poised depending upon what was said to buy or sell depending upon just what was said. And that is where we are at today.
Stock traders were disappointed with result and sold. And the reason for the disappointments was simple. A 25 bp rate cut was tolerable if there were further rate cuts to come.  Unfortunately, Powell’s tone and comments implied that another rate cut may not be forthcoming. Trump would have been inconsolable, as he has demanded big cuts because it goes with his Chinese narrative. For markets it is also a show of strength by the Fed. Simply put the Fed won’t be bullied, and that’s a good thing.



All 11 major sectors were down. Consumer staples, technology and materials were the biggest losers. Chipmaker AMD was down 10.1% after a disappointing third-quarter revenue forecast. The Philadelphia Chip Index was down 3.2%. Volume on the exchanges was strong with 8.92bio shares exchanged versus 6.19 bio average for the last 20 days.

The U.S. yield curve flexed itself today and flattened to the lowest level in four months. Short rates rose as the short end traders sold down positions as expectations for further cuts diminished. Powell called the cut a “mid cycle adjustment to policy “raising doubts that further cuts should be expected”.
European bonds were stressed as concerns over the no Brexit deal continue. Bunds fell with the 10-year bund now at a record low of -0.443%.
Cracks are starting to appear in the manufacturing sector within the U.S. The Chicago Purchasing Management Index fell to 44.4 the lowest level since December 2015. Poor regional factory numbers were offset slightly by a better than expected read on private employment which was up 156,000 for July.
The treasury is expected to sell $84 bio of debt next week as it commences its August funding task. About $57.3 bio will mature and rolled with an additional $26.7 bio raised.
 
The Rant.

It will be interesting to see what lies ahead for stocks and ultimately how that course will impact on bond markets.
The current conditions and the trajectory of equity prices is making the outlook for equities uncertain at best. Bullishness is slowly evaporating.
Interest rates are driving the rise in the stock indices as investors scale back their forward guidance. This is leading to a conflict in views.



Earnings to date have looked solid however if one strips out the unexpected strong results the picture is not so positive. Of the 35 or so companies that have revised guidance for the third quarter some 60% have slashed expectations. Netflix is one of the few that has issued a higher profit outlook but saw its share price trashed because international subscriber numbers were not as strong as expected.

The game at present is to revise down before reporting and that has actually seen share prices rise for those companies that have used this strategy.
Meanwhile the two big factors for markets globally are the Fed, and it has done its thing and then there is trade. Trade is the elephant in the room and has the ability to tip markets into the unknown.

Market Recap.

Equities: The S&P 500 fell 1.09% The Dow fell 1.23%. The Vix closed at 16.12. The Stoxx Europe 600 Index rose 0.2%.

Currencies: The euro fell 0.7%. The Bloomberg Dollar Spot Index rose 0.4%. The pound was flat.

Bonds: (as at 4.30pm). The ten-year is trading at 2.007%. The 2-year is trading at 1.868% and the 30-year is at 2.521%. The U.S. curve closed on the day with the following closes 2/10 at 14 bp, 2/30 at 65.1 bp and the 10/30 closed at 50.9 bp. The U.S. 5-year closed at 1.822%. The 2/5 spread is now -4.7 bp. The ten-year bund closed at -0.479% and the British gilt closed at 0.612%. The 10-year yen gilt is trading -0.155%. The 10-year OAT (France) is now -0.183

Commodities: WTI fell 0.1%. Gold fell 1.1%. Natural gas was up 4.77%.

Bitcoin is trading around $10,045.

Aussie Market Today.

Stocks to be weaker on the day. With expectations dashed and no strong positive news out of Shanghai, the ASX is likely to be disappointed with the U.S. result and struggle to rally.

Bonds should react to the Fed news with mild vigour. Most of the movement has most likely already happened however if the equity market takes a real tumble then bonds will rally. The cut in the U.S. and with no further cuts planned makes for an interesting time. This allows the RBA to hold rates steady for longer than if the Fed promised further cuts. The interplay between trader expectations will be interesting. If the equity market holds steady today bonds are likely to retrace a little. Otherwise there is capacity for a small rally.

Credit was a little wider overnight however demand is such that it can readily rally for the right issuer.

At least one more rate cut is now expected.

Credit continues to perform.

Geopolitical risks remain high and still need to be monitored.