Yesterday was that perfect day for peace, well perhaps. With little or no detail, it’s hard to judge the outcome, but so far peace on the Korean Peninsula is a real hope. As we know, however, the gulags remain – the U.S. war games with North Korea, remains of U.S. soldiers killed on the Peninsula and human rights violations in the North.

Other than that, Kim appears to have embraced the U.S. offer and has come out a winner. Who wins the Nobel Peace Prize is anybody’s guess but Kim looks a strong chance. The real winner out of this historic meeting is China.   For South Korea and Japan, the result is probably a disaster. For Taiwan, they will feel somewhat isolated as a result of the changes. Kim had a great victory at the expense of the Allies and the U.S.

Talking of winners, the rest of the week will be very much a winner takes all. Wednesday, we have the Fed and perhaps some commentary surrounding the expected hike. Thursday, we have the ECB possibly outlining the end of its free cash era.  And on Friday, we return to Japan for the BOJ’s comments around a possible hike. So, the interest market looks set to post rates higher.

What higher rates will do for equity valuations depends on the outlook of how many hikes are expected. My suspicion is that we could see a slide and if we transfer the pricing into an APT model then there should be an adjustment lower in valuations. Which model is used will depend no doubt on the investor outlook and that model will confirm the point of view.

Markets are now primed for the next few days. Volumes were lower especially in the equity market. Perhaps this is the calm before the storm. Wednesday the Fed is expected to hike rates to 1.75%. Fed futures indicate a 96% probability of a hike.

Analysts will be looking to the commentary from the Fed and any updated forecasts to determine how many more hikes are expected this year. The moderate rise in U.S. monthly consumer inflation for May supports a hike and probably a move in wording from accommodative to neutral.

What we do know however is that treasury investors are probably the most polarised they have been for weeks. The share of investors stating they are neutral and matching to benchmarks is 43%.

Bond markets are expecting further movements in bond rates and the move towards lower prices, i.e. higher yields. The share of investors who were short or holding fewer longer-dated bonds increased 4 points to 38% (according to a JP Morgan Survey).

The next days promise to be very interesting.


Equities: The S&P rose 0.2%. The Dow fell 0.01% and the Stoxx fell 0.1%.

Currencies: The Bloomberg Dollar Index rose 0.3%.  The euro fell 0.3% and the yen fell 0.3%.

Bonds: The ten-year closed around at 2.964%. The 2-year closed at 2.54% and the 30-year closed at 3.095%.

The ten-year bund closed at 0.493% and the UK gilt closed at 1.40% and the OAT closed at 0.83%. The U.S. curve closed the day with the following closes 2/10 at 42 bp, 2/30 at 55.3 bp and the 10/30 closed at 13.1 bp. The U.S. 5-year closed at 2.81%.

Commodities: WTI rose 0.2% and gold fell 0.3% and copper fell 0.3%

Bitcoin is trading around $6534. The fall continues following the recent hacking of exchanges and regulatory investigations.

Aussie Market Today.

The Aussie market will likely see bond selling over the course of the day. Expect the equity market to be steady ahead of Central Bank activity later in the week.