He’s done it again.

Just as markets were starting to feel comfortable with the fact that earnings may not rise in the 3rd quarter but Powell would cut, and all will be good in the 4th quarter, Trump did it again. Yes, just in case we had forgotten that the U.S. was involved in a trade dispute with China, Trump reminded investors that the dispute was far from finished. Trump said that he would impose more tariffs and that was that.

It is also worth remembering at this point that the WTO is about to hand down a favourable result to the U.S. over the subsidies Europe provides Airbus. So much for Trump’s distaste for the WTO. Europe is cringing as it expects some $6bio or so of tariffs to be placed on its aircraft and possibly tariffs imposed on agricultural goods that at this point are free from tariffs.

The Trump comments may be a tit for tat response to China after the Chinese Government warned they would impose tariffs on U.S. companies that supply military equipment to Taiwan.

As a result, the 5-day rally ended. Energy producers were sold. Technology also was off. The antitrust showdown for the technology companies with Congress is rapidly approaching and that is unsettling investors. Both JP Morgan and Wells Fargo reported earnings today. Both beat estimates. Johnson & Johnson slipped 1.6% after warning that generic drugs could impact its earnings. The turnover on the day remains below average with 6.18 billion shares being exchanged.

European equities rose on the back of weak data out of Germany and Brexit concerns. Yes, strange but true. The reasoning is that the ECB will have to provide further stimulus to the European economy.

The retail sales number was strong. Retail sales were up 0.4% and provided the early boost for equities before the market succumbed to Trump’s remarks. Powell also joined the fray and commented that the bank would “act as appropriate” to keep the U.S economy growing.  His sentiment is shared by a number of his Fed colleagues.

For fixed income, the retail sales were of concern. The retail sales points to an economy that is growing steadily and that with another rate cut perhaps inflation could re-emerge. Adding fuel to the fire, the Atlanta Fed lifted its GDP growth estimate for the 2nd quarter to 1.6% annualised. The growth rate is still well below the 3.1% pace of growth in the 1st quarter. Interest rate traders now have a 73% chance of a 25bp rate cut and a 27% chance of a 50 bp rate cut.

The 10-year rose in yield to 2.12% before retracing to 2.09% in late trading. Over the week, the yield curve has steepened. However,  today it flattened slightly.

For China watchers, the sagging Chinese economy must be highlighting some concerns and especially so in indebtedness. The nation’s stock of debt is now about 300% of GDP and is now about 15% of total global debt.

In an effort to stimulate the economy, which is reeling somewhat as a result of Trump’s tariffs, the government has tried to funnel credit into the private sector and encourage consumption. Aggregate financing is rising by 11% which is only exacerbating the debt to GDP. However, it is a risk the Government appears willing to take in an effort to stimulate the Chinese economy.

The Rant.

In a recent test of sentiment for leveraged loans, it is easy to see that sentiment can rapidly change. Leveraged loans are being bought mostly by mutual funds, ultra-high net worth individuals, family offices and collateralised loan obligations which are then turned into CDO’s. These loans are bundled up into what is then perceived as a lower risk offering. Buyers are easy to find with interest rates hovering around 1% to 2%.

However, the risks are still apparent. Clover Technologies issued a covenant lite offering. The offering contained no provisions that highlighted financial stress in any quarter, thus reducing the leverage of investors. The company is now stressed and the price of its debt has plunged markedly.

As the troubles emerged, the main investors such as the mutual funds were forced to dump the debt.  Investors were involved in a single loan and thus bore the brunt of the financial woes. The use of these loan only structures now appears in about 60% of buyouts in a sign just how pliant investors have become recently.

The message is that highly levered companies are very sensitive to revenue flows, and these cash flows can quickly evaporate. Investors need to remain vigilant if purchasing leverage loans.

Market Recap.

Equities: The S&P 500 fell 0.34%. The Dow fell 0.09%. The Vix closed at 12.86. The Stoxx Europe 600 Index rose 0.4%.

Currencies: The euro fell 0.4%. The Bloomberg Dollar Spot Index rose 0.4%. The pound fell 0.9%.

Bonds: (as at 4.30pm). The ten-year is trading at 2.106%. The 2-year is trading at 1.854% and the 30-year is at 2.614%. The U.S. curve closed on the day with the following closes 2/10 at 25.1 bp, 2/30 at 76 bp and the 10/30 closed at 50.8 bp. The U.S. 5-year closed at 1.871%. The 2/5 spread is now 1.6 bp. The ten-year bund closed at -0.293% and the British gilt closed at 0.814%. The 10-year yen gilt is trading -0.12%.

Commodities: WTI slipped 1.1%.

Bitcoin is trading around $9,623.

Aussie Market Today.

Stocks should be steady on the day with perhaps a hint of a rally. The trend will be confirmed by trading in Asia.

Bonds to drift and that means a slight drift up in yield. If the bonds are to move significantly it will be in response to a comment about trade. For the moment though, markets appear to be in a waiting mood.

The bid tone in credit remains. Credit was slightly wider, but I expect that remains for the synthetics whilst the bonds will see demand. Demand continues for corporate bonds.