Reasons to be cheerful?

There is a degree of irony about today’s stock rally and I guess that’s what you can say about the day’s purchases but I am not sure who the winner is. The winner could be the trader buying stocks at sharply lower prices or the seller who got away a bargain.

Either way, stocks have bounced after being down 2% and that’s largely due to a rebound in tech and that’s mainly hedge fund buying doubling up. Do I trust the rally?  No. Tech has issues and these have largely been forgotten. The trade tariff stoush between the U.S. and China is far from over and Canada still holds Huawei’s CFO, much to China’s chagrin.

We forget just what can happen as China mulls over what’s next. Meanwhile, Apple has been told to not sell old iPhone models in China because of patent violations. Things could get testy rather quickly which is why I am surprised by the rally today and especially so in Tech.

But there are other things that are looming. Whatever the market thought about a resolution on trade issues between the U.S. and China, we know that it is going to be difficult. The Democrats hold Congress and that weakens Trump’s position and they are likely to provide grief in the form that Ryan, Graham and McConnell wreaked on Obama.

The knives will be out and gloves off. The debt ceiling expanded with Trump and the GOP holding Congress and so too the budget deficit and alarmingly so. And this is all happening when the economy is starting to show signs of stress largely created by President Trump.

Whilst you can argue what Trump is doing relating to trade is necessary, it’s also very complicated especially so when it comes to IP. China is being pushed into a corner and it is becoming increasingly more difficult for China to make concessions.

At the same time, this spat is also hurting the engine of global growth which is the emerging markets. Until some form of concession is made, emerging markets are likely to suffer.

To demonstrate just how difficult all this is, all one needs to look at is the issue between Apple and Qualcomm. Qualcomm has won an interim order against Apple in Fuzhou for patent violation. Qualcomm has asked the U.S. Courts to ban Apple importing several iPhone models but has failed to agree. The issue is a mess.

Brinkmanship is coming to the fore in all quarters and that means increased volatility. If the budget deficit continues to deteriorate, the debt ceiling increases and tax receipts fall then the U.S. could and should find itself at the mercy of the ratings agencies. Should the U.S. be downgraded by a major agency, volatility will increase significantly.

Risks elsewhere are ratcheting up. In the UK, Prime Minister May has rescheduled the Brexit vote because she stood to see her vote on Brexit smashed. In response,  risk off gilts (UK bonds) rallied hard with the curve flattening and the chance to invert over the coming weeks.

Bond traders are expecting a defeat for the government on Brexit. The 30-year fell 17 bp to 1.66% the most since 2016 and 10-years rallied 10 p to 1.16%. Traders are not expecting a rate hike from the BoE.

In the U.S., Treasuries ran with the gilt bulls and staged a small rally. The inflation numbers due later this week are being widely anticipated. However, the forecasters have been hard at work with most forecasting one hike next year and at worst two hikes. This would indicate slowing growth and is sending a message the equity market should heed.

Goldman’s financial condition index has risen and is now at its highest point in two years. If conditions stay as tight, then there is a likely chance that GDP growth will stall and according to Goldman’s could fall as much as 1%.

Donald will have a very sore tweeting finger. The Fed has to be careful as well because it has to be careful how it slows its normalisation policy lest investors believe in the “Fed put” and think they will be bailed out with rate cuts if the economy runs into difficulty.

Based on prices on the CME, there is a 73% chance of a hike next week and a 49% chance of a further rate hike by the end of next year. Interestingly, contracts in 2020 are higher than in 2019 and this means some traders are betting on a rate cut in 2020.

To quote Tim Duy, University of Oregon economics professor,“ the situation on Wall Street is unpleasant and it, in turn, is creating considerable uncertainty about the outlook for monetary policy in 2019.”  So on the day, energy was the biggest percentage loser as investors fret about growth. T

 

Market Recap.

Equities: The S&P 500 was up 0.18% and the Dow rose 0.14%. The Vix closed at 22.62 while the Stoxx fell 1.9%.  Auto manufacturers and unrest in the UK and France were the prime causes of the Stoxx’s fall.

Currencies: The Bloomberg Dollar Index rose 0.5%, and the yen fell 0.5% and the euro fell 0.2%.

Bonds: (as at 4.25pm). The ten-year is trading at 2.857%. The 2-year is trading at 2.731% and the 30-year is at 3.132%. The ten-year bund closed at 0.244% and the OAT closed at 0.694%. The U.S. curve closed on the day with the following closes 2/10 at 12.5bp, 2/30 at 39.9bp and the 10/30 closed at 27.3bp. The U.S. 5-year closed at 2.714%.

Commodities: WTI fell 3.3%, gold fell 0.4% and copper (LME) fell 1.3%.

Bitcoin is trading around $3377.

 

Aussie Market Today.

Equities are likely to follow the offshore lead and probably rally. Any positive developments regarding Huawei would be bullish for the region.  However, that looks like a forlorn hope at this stage.

The strength of bonds should remain. However, expect bonds on the day to be steady unless of course, Asia moves in a risk off manner. In which case bonds will rally.

The Aussie dollar was weak as commodities slumped and king dollar was strong.