The Merry-Go-Round.

The title says it all and that’s pretty much how the markets are reacting. China appears to be holding out an olive branch to the U.S. in an attempt to get some tariff relief and has sweetened the deal. China by all accounts is looking to boost its purchases of U.S. soybean and maybe remove some tariffs from U.S. farm products. The negotiations are believed to have be face to face and will commence shortly.

For equity markets this is a boon and for other economies it is a welcome sign of perhaps an improving trade outlook.

Elsewhere the picture is not quite as rosy. Iran’s seizure of a British oil tanker ahs escalated tensions in the Straits of Hormuz with the British calling for a naval mission to counter Iran’s piracy (Reuters). The U.S. has also sanctioned China’s state-run energy company Zhuhai Zhenrong for violating restrictions imposed on Iran’s oil sector. The announcement has led to Chinese condemnation of the sanction.

The news though that the equity market ran with was the news about trade. The equity market was a little stronger on the day. Apple rallied after Morgan Stanley boosted its price targets. Earnings will be the key driver for any major rally in equity markets. On the day Facebook rallied 2%, and the technology sector was up 1.2%. The Philadelphia chip index rose 2%. Boeing shares fell 1%. Halliburton rallied 9%. Chip makers will meet with Larry Kudlow (White House economic adviser) to discuss a U.S. ban on sales to China’s Huawei Technologies. Volume on the day was light.

Investors will be looking to the results being reported by the larger multinationals that are reporting over the coming days. Investors will be looking for indications of any impacts due to tariffs or the slowing global economy. Alphabet, Unilever, Caterpillar McDonald’s and Boeing are all due to report their earnings shortly.
With dovish global central bank policies and demand for government debt supported by central banks, bonds remain bid. Expectations for a 50bp rate cut rose last week following comments by the New York Fed President John Williams. Those comments were quickly defused when the NY Fed clarified the comments and stated they were not about upcoming policy action. The probability of a 50bp cut is now about 25%. The Treasury will sell $113 bio of short and intermediate notes this week. Th Treasury will sell $40 bio of 2 year notes, $41 bio of 5-year notes and $32 bio in 7-year notes.

Congressional and White House officials reached a bipartisan deal to lift the government’s debt limit.

Oil rose on the back of Middle East tensions.

The Rant.

The dollar and the euro are on hold at the moment as traders wait nervously for interest rate decisions by the Fed and the ECB. Traders have a 46% chance that the ECB will lower its key deposit rate by 10 bp to -0.5% in an attempt to stimulate anaemic regional growth and inflation.

U.S. rates are currently implying a 23% chance that rates could be cut 50 bp at the end of the month. Most traders believe that the cut is not the beginning of a prolonged rate cut cycle rather it is a little insurance to stimulate the U.S. economy and keep the economy growing.

The swiss franc has rallied in this uncertainty and is at its strongest level since July 2017.

Market Recap.

Equities: The S&P 500 rose 0.28% The Dow rose 0.07%. The Vix closed at 13.53. The Stoxx Europe 600 Index rose 0.1%.

Currencies: The pound fell 0.2%. The Bloomberg Dollar Spot Index rose 0.1%.

Bonds: (as at 4.30pm). The ten-year is trading at 2.05%. The 2-year is trading at 1.816% and the 30-year is at 2.573%. The U.S. curve closed on the day with the following closes 2/10 at 23.2 bp, 2/30 at 75.7 bp and the 10/30 closed at 52.3 bp. The U.S. 5-year closed at 1.805%. The 2/5 spread is now -1.1 bp. The ten-year bund closed at -0.388% and the British gilt closed at 0.71%. The 10-year yen gilt is trading -0.138%.

Commodities: WTI rose0.8%.

Bitcoin is trading around $10,352.

Aussie Market Today.

Stocks should be steady on the day with perhaps a hint of a rally. Geopolitical risk will play its part watch for developments out of Hong Kong as tensions continue to escalate. Any major developments there could see the markets adopt a risk off attitude.

Bonds should be steady. Traders are awaiting the outcome of the FOMC meeting and the size of the expected rate cut. With geopolitical risks and tensions rising it is not hard to see the markets move to risk off which will benefit bonds. Domestically look to the data. There appear to be a number of data points that suggest that the economy is not as bad as perhaps the RBA believes. Increasing auction clearances and improving exports could mean the RBA may not ease further. If that is the case, then bonds could move higher in yield over time. The big issue however is what is happening in Hong Kong and the Straits of Hormuz. Both appear to be powder kegs that could affect markets.

The bid tone in credit remains. Demand continues for corporate bonds and especially so in non-bank credits. Credit was a little higher overnight. Strong equity markets will keep the bid tone for credit but any equity selloff would see credit wider.

Geopolitical risks remain high and still need to be monitored.