The Great Unwind.

Shares on the day were mixed and the general narrative for both stocks and bonds has been uncertainty. For equities investors are gravitating towards value stocks and bonds, well, they are unloved at present.

Equities were buoyed somewhat by the resignation of Bolton. The reasoning being that Bolton was hawkish and that raised the risks of a conflict somewhere. With Bolton gone, the prospect of conflict has diminished. Agreements may even now be able to be made. The news was bullish. However, the main game is the tug of war that is happening and that’s the trade-off between monetary policy and the slowdown caused by the trade war.

For equities, what performed last year are now the outcasts. The rotation out of growth to value is causing a rethink for strategies. Energy stocks are gaining popularity. Of the 11 major sectors, six were in the green. Interest rate-sensitive stocks such as real estate fell, and real estate was down 1.4%. Ford fell 1.3% after Moody’s downgraded Ford to Junk. Volume on the exchanges was very strong with 8bio shares being exchanged versus a 20-day moving average of 6.86 bio shares.

Bonds remain mixed with some tidal forces causing a re-think of strategy. Traders still expect the Fed to ease this month by 25 bp. The easing of tensions for the moment between China and the U.S. is taking its toll on bonds as traders rethink the risk-off strategies. The situation is further confused as Draghi’s reign at the ECB comes to an end and the German finance minister suggested that the nation was prepared to fight a possible recession with a stimulus package. The outlook for bonds is looking increasingly blurred.

Bonds continued to weaken as risk appetite improves. However, that can all change very quickly should no agreements between the U.S. and China is reached when the two countries meet next month. Traders are focussed on the outcome of the monetary policy meeting at the ECB on Thursday. Rates are expected to be cut, and some form of compensation is expected for the banks to offset the negative impact of negative rates. The bounce at present is being seen however as transitory with many participants expecting yields to fall with time. The retracement is seen as just that, a correction until the data suggests otherwise. Today’s 3-year Treasury auction was weak. The bid to cover was 2.42 times and the yield was higher than expected at 1.573%. Indirect bidders which include foreign central banks took 46.2%.

Market Recap.

Equities: The S&P 500 fell 0.03% The Dow rose 0.28%. The Vix closed at 15.2. The Stoxx was up 0.10%.

Currencies: The Bloomberg Dollar Spot Index fell 0.1%.

Bonds: (as at 4.30pm). The ten-year is trading at 1.744%. The 2-year is trading at 1.688% and the 30-year is at 2.227%. The U.S. curve closed on the day with the following closes 2/10 at 5.2 bp, 2/30 at 53.6 bp and the 10/30 closed at 48.3 bp. The U.S. 5-year closed at 1.603%. The 2/5 spread is now -8.9 bp. The ten-year bund closed at -0.549% and the British gilt closed at 0.634%. The 10-year yen gilt is trading -0.227%. The 10-year OAT (France) closed at -0.241 and the Italian 10-year bond (BTP) is now trading at 1.026% and the 30-year at 2.157%.

Commodities: WTI fell by 0.5%. Gold fell 0.8%.

Bitcoin is trading around $10,042

Aussie Market Today.
Stocks look likely to rally on the day. The day probably won’t see any large moves and more likely the rally will be muted.

Bonds will continue to weaken. The offshore trend is a risk-off mode and that is not favourable for bonds. The market will focus now on the Fed and any commentary from the RBA. The larger cycle looks to be that bonds rally and what we are seeing is consolidation albeit at a higher level. The risks remain, that’s a global slowdown, low inflation, and falling employment.

Credit to hold together as the equity market rallies.  Demand for quality issues ex banks remains strong.

Geopolitical risks remain high and still need to be monitored. Watch developments out of Hong Kong as the protests have a real chance of upsetting sentiment in the region. Watch for a tweet on trade or comment on trade out of China, either commentary will have the ability to move markets.