How many times can the market and investors be fooled yet again? It seems the desire to invest overcomes rational thought and the simple fact that once again we have a déjà vu moment. Once again, a trade deal with China is just around the corner. And once again, we lose all basic instincts and add to risk.
Once again, the S&P500 rallied after President Trump said he sees progress and will extend the trade truce to avoid doubling tariffs. And once again Trump has claimed a victory when there is none. Intriguingly though, if all was so good why then is Trump at odds with his trade czar Robert Lighthizer?
Even more intriguing was the flare-up between the two that occurred in front of the top negotiator for the Chinese. The two jousted in front of journalists in what became a very public exchange. Trump does not believe in Memorandum Of Understandings as they are in his opinion non-binding whereas Lighthizer, who is a lawyer, believes they are binding.
The flare-up was amusing for the Chinese negotiators and for Trump the inability to close negotiations with the Chinese and claim a win appears distant. This all points to Trump replacing Lighthizer if Trump believes negotiations are breaking down. The Chinese can wait and claim a trade czar should Trump look at replacing his trade negotiator.
Markets are also rallying because data is suggesting growth is sluggish and that allows central banks to keep interest rates low and liquidity high. A low interest rate justifies stock multiples at current levels. The Fed is recalibrating, and stock investors are betting, that interest rates will remain steady. On the day Kraft reported disappointing results and that set off some selling in consumer staples.
The new nuance in Fed speak has yet to be fully understood by the market. And for Friday’s trade risk was not necessarily taken off as risk assets rallied. Treasury’s rallied on comments made Friday and in particular, Fed vice chair Richard Clarida and his ‘’review comments’’.
What has confused the Fed is traditionally as labour markets ran hot, inflation would rise. That is not happening, and the relationship has weakened. Maybe the Fed is underestimating the amount of leverage carried by many middle-class Americans through student debt or mortgages and that many are underemployed or wages have remained perilously stagnant.
Keep March 1 in your calendar. March 1 is the final day that the U.S. Government is funded. The Fed’s shift from tightening has helped pacify the market a little. The MOVE Index has moved from 68 in December to less than 47 and the 10-year is now almost within 12bp of its January low.
Traders are looking to see what steps Mnuchin takes to keep the Government operating. For some pundits, the crunch day is in August and that explains why the 6-month bills have dislocated somewhat from the market. The big issue is more around tax revenue and that is creating uncertainty as revenue has been falling and expenses rising.
March looks like being a very interesting month.
Equities: The S&P 500 rose 0.64% and the Dow rose 0.7% The Vix closed at 13.51 while the Stoxx rose 0.20%.
Currencies: The Bloomberg Dollar index rose 0.2%.
Bonds: (as at 4.30pm). The ten-year is trading at 2.654%. The 2-year is trading at 2.497% and the 30-year is at 3.017%. The ten-year bund closed at 0.095% and the British gilt closed at 1.16%. The 10-year yen gilt is trading -0.04%. The U.S. curve closed on the day with the following closes 2/10 at 15.2bp, 2/30 at 51.7bp and the 10/30 closed at 36.2bp. The U.S. 5-year closed at 2.471%. The 2/5 spread is now -2.9bp.
Commodities: WTI rose 0.4% and Gold rose 0.2%.
Bitcoin is trading around $3,793.19.
Aussie Market Today.
Equities appear to want to rally. Buoyed with possible trade news good news stories and Trump traveling to meet Kim, Asian markets look set to rally and this will help the Aussie market.
Bonds look likely to hold onto gains and continue to rally. The outlook of low rates and uncertainty in economic data will help to keep a bid tone for bonds. The RBA is concerned about housing and is unlikely to hike anytime soon. Some economic analysts are now suggesting a couple of rate cuts during the year when only a month ago they were expecting rate hikes. Pessimism is dominating strategy.