The Reflex.

A reflex action is a reaction to something that happened and that pretty much sums up the saga of markets. More trade talk and yes, the market rallies. Today’s news was that those car tariffs that were due to commence this weekend would be delayed by at least six months.

Europe heaved a sigh of relief. Then we got news that the Mexico, Canada Agreement relating to metals was near completion. China joined the party saying they were in discussions with the U.S. and all could be sorted. All this love led the markets to enjoy a rally. Even bonds rallied.

The message at present appears to be that lessening trade disputes is received well, and stocks in particular are likely to rally. The news on metals helped. Weak data out of the U.S. and China set the tone for the bond rally, as concerns mount about the state of the global economy.

U.S. retail sales were weak, down 0.2% and factory production fell in April, for the third consecutive time. Manufacturing output contracted 0.5%. Total industrial production also decreased 0.5%. Manufacturing is losing momentum amid the trade spat with China.

The message from today though is clearly that the markets are listening to Governments about what they have to say about trade and are reacting according to the news.

Stocks do have a solid base. First quarter growth earnings for the S&P 500 is about 1.2%. That’s much higher than the expected 2% loss that was forecast April 1. Of the 11 major sectors, 8 were in the black. Communications led the way. And that was a result of both Alphabet and Facebook leading the charge. Macy’s Inc fell 0.5% and that’s a tariff related story.

The economic data is the story today. Yields rallied in the front end. The rally suggests that the Fed may capitulate on the refrain from cutting rates. A slowing economy will certainly add weight to Trump’s call to cut rates. The Fed Fund Futures is currently implying a rate cut of about 25 bp at the September policy meeting of about 54% and for December the probability is 78%.

The bonds did set off a mild panic attack as the 2-year hit its lowest level since February 2018, and the 2/5-year gap pushed to -1.40bp. The 2/5-year is often seen a harbinger of slower economic times. So, questions are being asked once again about the economy.

The Atlanta Fed cut its GDP estimate to 1.1% annualised from 1.6%. In a recent poll, 41% of traders were expecting one rate cut of 25bp whilst 25.5% were expecting rates to be 50bp lower by December. Expectations that rates will be the same in January 2020 are just 19%.

Germany is being seen as the safe haven from Italy and the trade war. Germany has seen a bit of growth unlike Italy. The return to growth in Germany was helped by household spending and a booming construction sector. Europe is very much in risk off mode and the bund is the benefactor. The BTP’s (Italian Bonds) remain vulnerable with the 10 year trading at 2.75% versus a bund at -0.099 and at one stage was at its lowest level since October 2016 at negative 0.13%. The 30-year bund ended at a 2 ½ year low at 0.496%.

The Rant.

The Chinese selloff of treasuries appears to have commenced. China appears to have sold $20.45 bio of treasuries in March, the most since October 2016. China’s holdings are now at $1.121 tr as at March, the lowest level since May 2017. The dismal 10-year auction last week renewed speculation that China was not an active participant in the auction.

However, the sale of some U.S. treasuries makes sense in the context that China is defending the yuan and needs cash. That means selling reserves such as U.S. Treasuries to buy yuan and hence stabilise the currency. In the past, China has sold treasuries to defend the yuan. In 2016, the PBOC sold $188 bio treasuries to defend the yuan which fell some 7%.

One should remember that China’s reserves are $3.1tr in foreign currency reserves and those reserves are used to manage its currency. If there is no trade deal, then China will need to defend the yuan and as such will need hard currency to intervene. The U.S. Treasuries then become part of that equation. A hard sale by China  as a result of trade could see the marketplace adopt a risk off attitude, allowing investors to purchase treasuries at a higher yield and thus buffering the treasury market.

Foreign central banks and other entities have also accelerated their reduction in U.S. assets by selling $21.7 bio in March.

Market Recap.

Equities: The S&P 500 rose 0.58% and the Dow rose 0.45%.  The Vix closed at 16.44 while the Stoxx Europe 600 Index gained 0.5%.

Currencies: The Bloomberg Dollar Index flatlined. The euro was steady. The pound fell 0.5%.

Bonds: (as at 4.30pm). The ten-year is trading at 2.377%. The 2-year is trading at 2.164%. The 30-year is at 2.82%. The U.S. curve closed on the day with the following closes 2/10 at 21.1 bp, 2/30 at 65.7 bp and the 10/30 closed at 44.4 bp. The U.S. 5-year closed at 2.151%. The 2/5 spread is now -1.4 bp. The ten-year bund closed at -0.099%. The British gilt closed at 1.071%. The 10-year yen gilt is trading -0.052%.

Commodities: WTI climbed 0.7%. Gold rose 0.1%.

Bitcoin is trading around $8,134.

Aussie Market Today.

The general trend is risk on. However, that has to be tempered by news relating to trade and also an indicated slowing global economy. Stocks are now heavily dependent on news relating to trade. Sort out trade and markets rally. Today, however, we should see the rally continue barring any noise related to trade. The ASX will probably drift along with investors remaining guarded and waiting to see the election result. A LP win would see stocks rally.

Bonds will drift and continue to rally. Concerns about global growth slowing should spur bonds towards lower yields. The election over the weekend will keep everyone on their toes, so I am not expecting any major movements. Those movements probably happen next week. Credit continues to be in demand as stocks rally and the Aussie $ continues to look a tad pressured, now at about 0.6924.  A strong economy should have a higher exchange rate.

Geopolitical risks remain high and still need to be monitored.