As summer draws towards a close and traders pine for some summer holidays, markets in some way feel lugubrious, tired and sleepy. Markets want to do something but they just cannot work out what it is that they want to do. Trump is not helping. In one breath he is chastising Iran or China and in another he is making Israel fearful by suggesting he wants to meet the President of Iran.
The tactic that he used on North Korea appears to be the same tactic from his playbook. Rattle a sabre or two and then be conciliatory. Who knows? Something positive may come out of this. However, one thing is for sure, traders won’t be able to go on their holidays without remaining connected, because tariffs and an outbreak of peace are all on the cards.
So what happened today? Well, tech continue to be a wrecking ball and bonds are edging higher. The 10-year is now blissfully close to 3% which for some is the transition towards a bear market. Let’s wait and see because with the debt ceiling looming at the end of September and an interest rate hike possibly in August, the market has the potential to turn bearish very quickly.
The concern for the tech stocks is a valuation problem and that is something that won’t go away quickly. Of the 11 major sectors of the S&P 500 7 were in negative territory. Energy was up 0.8%.
Meanwhile, we know the BOJ is looking to refine its interest rate policy which is why the JGB 10-year has doubled. The ECB is also fine tuning its interest rate policy and as such all eyes are focused on the central banks.
The surge in issuance of short bonds by the Fed was the prime driver in the front end of the curve. The borrowing requirement for the third and fourth quarter are as high as in 2010, the fourth largest on record. The Federal Budget is expected to now hit $833 bio versus an earlier prediction of $666 bio. As a result, issuance is expected to balloon and understandably investors are requiring a higher rate of return.
Equities: The S&P fell 0.58% The Dow fell 0.57%. The Stoxx 600 fell 0.3%
Currencies: The Bloomberg Dollar Index fell 0.2%.
Bonds: The ten-year closed around at 2.975%. The 2-year closed at 2.665% and the 30-year closed at 3.107%. The ten-year bund closed at 0.449% and the UK gilt closed at 1.353% and the OAT closed at 0.751%. The U.S. curve closed the day with the following closes 2/10 at 30.8 bp, 2/30 at 44 bp and the 10/30 closed at 13 bp. The U.S. 5-year closed at 2.856%.
Commodities: WTI rose 2.04% Gold fell 0.2%, and copper fell 0.29%.
Bitcoin is trading around $8,122.
Aussie Market Today.
Equity markets should be weak on the day. Bonds could be a little tricky on the day. The weakness in the U.S. bond market and with uncertainty over Japan’s interest rate policy, the expectation is that bonds will weaken. Such a move would be an uncorrelated move with equities as typically the two assets move in opposite directions (not always though).
Geopolitical risks remain high.