One could be sorely tempted after looking at today’s trading activity to believe all is good with the world. And for the moment that probably is true. However, there are several themes that can possibly derail markets, and these deserve consideration.
As a result of pushback from Trump’s policies on Iran and trade, some European States and also some Asian states have criticised Trump and his policies. As a result, Trump is looking at imposing tariffs on imported cars on the grounds of national security.
This is a step that Europe certainly was not looking for but also shows how wilful the Trump Administration is when dealing with critics. This development undermines free trade and threatens many close relationships that the U.S. has with some of its allies. This development further undermines the U.S. positions especially as the U.S. has benefited significantly from free trade and has certainly pushed the boundaries.
At a time when economic growth in Europe appears to be slowing, Trump’s war on trade appears to be coming at the wrong time. And Europe is not happy. The risk is that Trump ignites a trade war with his allies and those allies then align towards other economies such as China. The loser being the U.S. as isolationism does not work.
All this does not affect markets today. However, these issues will over time.
On the day, bonds rallied as a result of increasing geopolitical tensions and the equity market rallied because the Fed will tighten in June. However, the Fed indicated that it would be slower to tighten in the future as the economy bounces around its inflation targets and long-run estimates.
The Fed in its Minutes did raise concerns over uncertainty relating to U.S. protectionist trade policies. Rates are close to the neutral stance which is estimated to be between 2.3% and 3.5%. The Fed still sees its policies as being accommodative. As a result, traders now believe that two more hikes this year will occur and not three as indicated earlier in the year.
The 5-year auction result went at 2.864, near where it was trading before the auction. Dealers took a larger than usual share reflecting the fact that the market is starting to have some absorption issues. The bid to cover was 2.52.
German bunds tumbled today. Part of the rally can be attributed to fears relating to Italy and also as a response to a weak PMI. The PMI was at 54.1 and was well below all forecasts. Italian 10-years traded up 10 bp today to close around 2.46%. Concerns over the new coalition policies are pushing yields higher.
The equity market rallied as a result of the Fed Minutes indicating a slower rate of hikes. Overhanging the market, however, are concerns over trade and geopolitical risks.
Equities: The S&P 500 rose 0.3% The Dow rose 0.2%. The Stoxx fell 1.1%
Currencies: The Bloomberg Dollar Index rose about 0.1%. The euro fell 0.6% and the yen rose 0.7%.
Bonds: The ten-year closed around at 3.005%. The 2-year closed at 2.53% and the 30-year closed at 3.15%. The ten-year bund closed at 0.507% and the UK gilt closed at 1.44% and the OAT closed at 0.807%.
The U.S. curve closed the day with the following closes 2/10 at 46 bp, 2/30 at 62 bp and the 10/30 closed at 15.9 bp. The U.S. 5-year closed at 2.825%.
Commodities: WTI rose fell 0.5% and Gold dipped rose 0.2% Copper continues its slide and fell 1.9%
Bitcoin is trading around $7580.
Aussie Market Today.
Equity markets should trade a little stronger on the day. Bonds should rally on the basis of geopolitical concerns and as a safe haven for investors looking for diversity away from emerging markets and Europe’s woes.