The Godot Moment.

In the play our heroes wait and wait for something but nothing changes. The tree grows leaves then loses them, nothing changes. The same things happen again and again. And in the same way that there was a quasi-master slave relationship between Godot, Gogo and Didi, markets are behaving as if they are waiting for their master to arrive and he never does. Markets are waiting for news on trade and we have now for some time, our master the President says that a deal will be done soon, and we still wait.

Today was more of the same. The President said that a deal was imminent. Sarah Sanders told anyone who wanted to listen that Beijing had indicated that China wants a deal. Stocks rallied for a while, but then weakened. The dollar rose and treasuries fell. Does this storyline so far sound familiar? Volatility is playing with stock traders minds and volatility is driven by headlines. Traders are now concerned that with the arrival of Liu He on Thursday negotiations will either be fruitful or collapse.

The last 30 minutes saw stocks sell, and this suggests that as we enter the later period of the week that sentiment is bearish. Support for stocks came in the form of the defensive sectors performing with real estate and healthcare the top gainers. The S&P 500 is now 2.5% below its record high, hit last week. Disney rose 1.2% ahead of its quarterly result and its rise boosted the S&P 500. Of the 426 S&P 500 companies that have reported, 75% have beaten estimates. Volume on the day was solid with 7 bio shares changing hands.

Treasuries spiked today and not because of anything the Donald said but rather what the 10-year auction said. At current levels, bond traders / investors see yields as neutral and there is no real conviction to push yields lower for the moment. Markets thought that with risk off, the auction would be keenly sought but that was not the case. The ratio of bids was 2.17 the lowest since March 2008. Trump’s tweet that “China was coming to make a deal” did not help the auction. Thursday, we have the 30-year auction.

Of interest, Lael Brainard has suggested that in another crisis the Fed should look at longer maturities to add more stimulus to the economy. This is an interesting development.  Lael suggested that 1-year and 2-year rates could be targeted. This is yet another example of the Fed testing market appeal as it looks to review its operating tools and strategies.

Gilts rallied strongly on the day and at one point the 10-year as trading at 1.096%, all on the back of a report by ITV that talks between the government and the opposition on a compromise over Brexit had collapsed. Bonds are continuing to rally in uncertainty and the market has priced in a less than 25% chance the BoE will raise rates this year.

The Rant

So, what is the impact of Trump’s tariff hike, if it does eventuate? The immediate effect will be felt in the everyday consumer goods and things such as circuit boards, equipment that is vital in a range of everyday items of necessity such as computers, mobile phones and other devices. For example, $45bio worth of mobile phones were imported into the U.S.

To get around the problem in the past, U.S. companies have front loaded purchases ahead of any implementation. The result is that the amount that tariffs raised is different to the expected amount. For example, the potential pool of new Chinese products is less than $300 bio and lower than Trump’s tweet of $325 bio.

According to UBS, 32% of their high net worth portfolios are in cash. In Asia this was 36%, in Europe it was 35% and in the U.S. 23%. What this says is that investors are still sitting on their hands and that many were ill positioned for the recent rally. FOMO (fear of missing out) can be a strong sentiment and should that money be put to work en masse then investments could be in for a strong rally.

All we need is a certainty on trade.

Market Recap.

Equities: The S&P 500 fell -0.16%. The Dow rose 0.01%.  The Vix closed at 19.40. The Stoxx Europe 600 Index rose 0.2%.

Currencies: The Bloomberg Dollar Index gained 0.2%, and the euro was flat. The pound slumped 0.5%.

Bonds: (as at 4.30pm). The ten-year is trading at 2.485%. The 2-year is trading at 2.301% and the 30-year is at 2.894%. The U.S. curve closed on the day with the following closes 2/10 at 18.5 bp, 2/30 at 59.5 bp and the 10/30 closed at 40.9 bp. The U.S. 5-year closed at 2.288%. The 2/5 spread is now -1.4 bp. The ten-year bund closed at -0.048% and the British gilt closed at 1.135%. The 10-year yen gilt is trading -0.051%.

Commodities: WTI rose 0.9%. Gold fell 0.3%.

Bitcoin is trading around $5,901.

Aussie Market Today.

Equities, what to do today? Look towards Asia for guidance. Offshore markets were initially strong and then weakened into the close, indicating a bearish sentiment. I expect that the ASX will be a tad weaker on the day for no particular reason. Asia should be steady unless they have a better insight as to what Trump and his trade team are doing.

Remember that both the Chinese and U.S. trade teams meet Thursday and Friday. My guess is that any announcement will be out of hours in this time zone so if anything, that means the market will be quiet and drift. A drifting market usually ends slightly weaker.

Bonds are in a quandary. Yesterday they rallied as expected and today there will probably be a little retracement. Conviction offshore for bonds is not strong at present so unless there is news to the contrary bonds may ease back a little and end with yields slightly higher.  Credit widened a little overnight. Swaps may also edge wider on the day.

As expected, the RBNZ cut rates to 1.5% an all time low.