Future shock.

Today was mostly about trade. Talks between the U.S. and China appear to be providing some hope of a resolution after it was announced that the U.S. would pause some tariffs that were due to be implemented.  This pause was seen as a Chinese precondition to any talks being held with the U.S. So all good so far.

Chinese equities rose on the news, and so too U.S. equities. Earlier in the day, retailers acted as an anchor as a weak outlook weighed heavily on consumer discretionary stocks. The saviours were once again tech and the tariff news. Cisco was up 5.2%, Apple regained some strength and was up 2.6%.
Bonds staged a small rally on the day. Much of that was related to the political uncertainty in the UK.

But the real news of the day was the UK’s ‘Greece’ moment. What a shambles. No sooner had May announced the Brexit negotiators had come up with a deal, then we saw pandemonium. Ministers that had helped negotiate the deal resigned, other Ministers resigned because they disagreed.  It was if it were a Greek tragedy unfolding.

The pound slumped with some saying the volatility now is so great that one cannot meaningfully trade. The 20-year auction went so wide that the Treasury had to accept low ball bids (1.75% with a gap of 5.1bp the average is 0.6bp), something not seen since 2009. The 10-year rallied 15 basis points after the BoE unleashed a round of stimulus.

The net result is that Gilt 10-year vs the U.S. 10-year is now trading 174 below a level not seen since June 1984 (Reuters).  Sterling fell 1.7%. The bond investors are now betting that the BoE will not raise rates until 2020. Short sterling futures spiked 10 points indicating that investors were not expecting a hike anytime soon. For primary dealers, this volatility is a boon and there is an expectation that they will be taking on risk (bonds).

Amidst the turmoil, bunds rallied. The 10-year bund rallied 5bp to close 0.35%. Italy was unchanged. However, it does appear as though Conte (Italian PM) is trying to smooth the market and that has helped settle BTP’s. In some ways he is playing the role of good cop.

With all this noise the canary in the mine, high yield, still appear to be defying gravity. In the recent selloff, HY has outperformed equities by some margin with the ICE BofAML U.S. High Yield Index declining only 2% in October versus equity (S&P 500) of about 7%. Typically selloffs in HY have preceded major declines in equity markets.

Some are reviewing the pattern of HY as an indicator. Central banks distorting asset prices, surging tech stocks, and demand for yield are driving the sector. Also issuance has been low. Issuance by lower rated companies are down 30% in the first 10 months of 2018 compared to 2017.

The news of the day though relates to the woes of PG&E. The utility (electrical) is being blamed for not properly maintaining its hardware and as a result being the cause of the bushfires in California.

The damage bill is expected to be way in excess of its capitalisation and its share price has fallen 31%. The company is in the midst of rolling a $1 bio short term debt facility and that now appears very difficult. It already faces issues from fires in 2017 and now looks likely to have a bill of at least $30 bio leading to speculation that it may need to file for bankruptcy, something it did in 2001.

GE is also a fallen soul. Its spreads have widened significantly with its 2034 issue out some 140 bp since September. Such a move points to considerable stress in the Company. On the day, spreads widened 30bp in the U.S. The GE U.S. 2034 issue is now trading around 305 over treasuries pointing to a rating level more in the high single B or low BB’s.

Market Recap.

Equities: The S&P rose 0.94%. The Dow rose 0.84%. The Vix closed at 20.26. The Stoxx fell 1.1%.

Currencies: The Bloomberg Dollar Index was flat, the euro rose 0.2%, and the yen was steady rising 0.1%.

Bonds: The ten-year closed around at 3.11%. The 2-year closed at 2.858% and the 30-year closed at 3.363%. The ten-year bund closed at 0.362% and the OAT closed at 0.753%. The U.S. curve closed on the day with the following closes 2/10 at 25.2 bp, 2/30 at 50.5 bp and the 10/30 closed at 25.1 bp. The U.S. 5-year closed at 2.938%.

Commodities: WTI rose 0.4%, LME copper gained 1.5% and gold rose 0.2%.

Bitcoin is trading around $5435.

Aussie Market Today.

The trend continues for equities. As long as the talk remains focused on U.S. Chinese bilateral talks on trade then the equity market should continue to improve. Commodities were a little stronger so that should help.

Bonds could be mixed. The U.S. rallied but that was over uncertainty relating to Brexit. The uncertainty seems likely to continue as May’s support dwindles. I expect bonds to rally or at least be steady due to political uncertainty and a confused outlook. The trend is, however, for bonds to increase in yield over time.

The Aussie dollar continues to hold despite a strong dollar and commodities stalling. With an outlook that is biased towards slowing, the Aussie looks vulnerable to a fall.