The Mood is Darkening.

Cohen and Manafort are convicted. U.S. markets react.

U.S. markets reacted to the overnight news that both Cohen and Manafort, both close Trump confidantes, were convicted and are likely to assist Mueller with his election probe. Stocks slipped whilst the dollar slumped and bonds rallied a little. People just became a little more cautious.

For the moment, Trump can feel safe. However, if the Democrats can win the mid-terms then his position as President become tenuous as best. All at time when the debt ceiling needs to be passed again and with greater issuance of treasuries and increasing deficits, a heady recipe for future volatility.

In the Fed minutes today, the main themes were the Fed is likely to hike next month. However, the Fed is fretting about the trade disputes the U.S. is having and the likely impact on the economy. The Fed believes the tariff spat will slow the U.S. economy.

The Fed is caught in a place where the risks of a slowing economy are elevated because of the trade tariffs dispute and a want to tighten to reduce its holdings and also to keep inflation under control allowing the economy to achieve full employment. A difficult task indeed.

The Fed’s task is also made more difficult because the U.S. President sees the Fed in the guise as the traditional Fed, one that lowers and raises interest rates that have an impact on borrowing costs. The Fed has assets maturing and as those assets mature, pressure is put on rates and long term yields.

We are probably already seeing that in mortgage rates in the U.S. Mortgage rates have risen about 75bp since the balance sheet runoff began and the Fed reduced its balance sheet by about $200 bio.

Market Recap.

Equities: The S&P fell about 0.04%, the Dow fell 0.34% while the Stoxx 600 was unchanged. The Vix closed 12.25.

Currencies: The Bloomberg Dollar Index fell 0.2%, the yen fell 0.2% and the euro surged 0.3%.

Bonds: The ten-year closed around at 2.82%. The 2-year closed at 2.595% and the 30-year closed at 2.983%. The ten-year bund closed at 0.34% and the UK gilt closed at 1.274% and the OAT closed at 0.689%.

The U.S. curve flattened on the day and closed on the day with the following closes 2/10 at 22.4 bp, 2/30 at 38.9 bp and the 10/30 closed at 16.3 bp. The U.S. 5-year closed at 2.704%.

Commodities: Crude rose 3.3%. while Gold was steady up 0.3%. The Bloomberg Commodity Index rose o.2%

Bitcoin is trading around $6,467.

Aussie Market Today.

The lead for the equity market will come from Asia. I expect a steady day but a lot will depend upon the news on the day. The Trump Administration is meeting the Chinese delegation so any commentary will most likely decide the market direction.

The Shanghai 300 is down 0.7% and down 18% year to date. The index may be telling us what the likely direction of trade talks will be.

Ditto for bonds. The direction will come via any commentary. I expect bonds could rally early on the day.