Let’s Talk About Trade.

Once again trade tensions bubbled up to the surface and loom large as having a possible impact on global growth. China is wailing that the U.S. is trying to blackmail them into trade submission and are rallying to impose tariffs shortly. For the moment, it all looks likely to get ugly. The strange thing is that bonds are reacting as if the economy is growing and equity seems to be shrugging off the problem and focus instead on earnings and what may be.

The equity market did however in NY sell down those industrials that analysts believe will be affected by trade barriers or higher input costs. Apple tried to rally the cause with a spectacular earnings result. Its share price rose 6%. But that was not enough. On the day, the various indices weakened and shares fell marginally.

Many equity analysts are now waiting to see what happens about tariffs and whether the U.S. is about to go into a trade war with one of its largest competitors and suppliers, namely China. The impact on China certainly is being felt with copper slumping 3.3% and the Shanghai 300 falling some 2% on the day and down 14% for the calendar year.

The big game, however, is gaming the JGBs following the BOJ’s determination to keep rates low but allow some movement in the 10 year. This created a real battle royale with traders having a try. The traders were winning.  However, the BOJ then purchased 1.64tr yen of JGB’s (approximately 4 times the normal amount) leaving traders short, flummoxed and stranded.

Repo rates will no doubt move significantly. The JGB game could be felt elsewhere and was one of the many reasons suggested for the movement in U.S. bond yields, although the Treasury may have also been partly responsible.

The Treasury announced a new benchmark 2 month bill and increased issuance for 2, 3, 5 year securities of $1 bio for each bond in the upcoming tenders. The amount of issuance in 7, 10, 30 year bonds will also increase by $1 bio per maturity until October. All up, the increase in issuance is similar to levels of issuance in 2010 and highlights the falling tax receipts. The issuance for the September quarter is expected to be about $239 bio.

Jerome Powell reiterated the strength of the U.S. economy but did not raise rates today. Traders are now pricing a 91% probability in September and a 71% probability of a rate hike in December according to CME Fed Futures.

The U.S. curve steepened on the day.

Of note too, this week past heralded the 23rd consecutive week that bond funds have seen positive flows.

In other news, shale oil producers saw their share prices slump as hedging costs rose. U.S. crude inventories rose amid rising trade tensions and a fall in exports.

Market Recap.

Equities: The S&P fell 0.1%. The Dow fell 0.32%. The Stoxx 600 fell 0.5%.  Vix closed 13.5.

Currencies: The Bloomberg Dollar Index rose 0.1%

Bonds: The ten-year closed around at 3.00%. The 2-year closed at 2.68% and the 30-year closed at 3.131%. The ten-year bund closed at 0.483% and the UK gilt closed at 1.386% and the OAT closed at 0.786%. The U.S. curve closed the day with the following closes 2/10 at 32.4 bp, 2/30 at 45 bp and the 10/30 closed at 12.4 bp. The U.S. 5-year closed at 2.875%.

Commodities: WTI fell 1.34%. Gold 0.77%, and copper fell 3.3%.

Bitcoin is trading around $7,495

 

Aussie Market Today.

Equity markets should weaken on the day. Bonds could be a little tricky on the day.  However, the  general direction appears to be sell. Watch for any news out of China.

Geopolitical risks remain high.