We all need a holiday.

Markets in the U.S. closed early in anticipation of the 4th July Holiday. In fairly light trading, the equity market slipped and bonds rallied. I expect more of the same Friday as many desks will be lightly manned. Trading levels were down 20% on the day.

The real deal, however, is China, and China’s response to the imposition of tariffs by the U.S. The yuan slipped yesterday causing intervention by the Peoples Bank. This time the intervention came by way of comments from Yi Gang, President of the PBOC. On the day, the yuan fell 1.1% and is down 4% since early June. However, the fall suits exporters.  The latest export data suggest that exports to the U.S. have slowed.

Trade tensions appear to be the catalyst for most market movements. For instance, the Nasdaq was affected by a Chinese Court that temporarily banned Micron Technology chip sales in China. However, things look to only get testier after China Mobile was being prevented from entering the U.S. market.

Whilst on trade, Trump may have a point about wages. The recent victory in Mexico by Obrador and his willingness to discard NAFTA and negotiate a new deal directly is interesting. Apparently, wages in Mexico have remained at similar levels to what they were when the NAFTA Agreement was first signed. Wages have not risen.  A portion of Obrador’s election manifesto is related to wages growth. Perhaps he sees an opportunity to grow wages in a new trade environment.

So here we are at the halfway point of the year and many decisions are likely to be made concerning a reassessment of investment strategies. In particular, the Chinese yuan and equity markets look vulnerable and India’s rupee is at a record low.  Bank of America Merrill Lynch global equity funds posted their biggest ever weekly outflow last week of $30bn.

Credit and emerging market spreads are drifting wider. Moreover, long positions in tech stocks look crowded and expensive. The benchmark Treasury yield curve is flattening and is at its flattest for 10 years. Similar points in history, such as between July 1997 and October 1998, saw the S&P 500 falling 22% and the yen surging 30% and bond market volatility tripling.


Equities: The S&P fell 0.5% and the Dow fell 0.53% while the Stoxx 600 rose 0.8%.

Currencies: The Bloomberg Dollar Index fell 0.6% while the euro gained 0.1%.

Bonds: The ten-year closed around at 2.83% while the 2-year closed at 2.53% and the 30-year closed at 2.96%. The ten-year bund closed at 0.294% and the UK gilt closed at 1.24% and the OAT closed at 0.582%.

The U.S. curve closed the day with the following closes 2/10 at 30.3 bp, 2/30 at 43.1 bp and the 10/30 closed at 12.6 bp. The U.S. 5-year closed at 2.72%.  The U.S. yield curve flattened on the day.

Commodities: WTI fell 0.2% while gold rose 0.9%. Copper fell 0.71% and silver retraced 1.4% following yesterday’s loss.

Bitcoin is trading around $6,591.

Aussie Market Today.

Markets should be quiet today. No activity is expected for the next few days. Moreover, the weekend traders are more likely to square their positions rather than set new positions especially given that political comments could easily roil markets. Expect bonds to drift tighter and equity to sell a little.

The key will most likely be the yuan. Any significant move will prompt market reactions. In addition, geopolitical risks remain high.