Stormy weather?

Friday was all about the data. After some selling on the back of a strong retail sales number for August, traders focused on the post treasury auction.  Once the longer maturities cheapened, the buyers returned with gusto. The 10-years bounced off the 3% bogey.  And at that level, it was a signal to buy.

Chicago Fed Governor Evans spoke on Friday and his hawkish tone led the bonds on a merry dance higher in yield. Evans suggested that a 3% to 3.5% Fed funds rate was in the offing for 2019-2020 and that was the long-term sustainable growth rate. Mnuchin may be somewhat dismayed by those comments because +3% borrowing rates don’t appear to be in the Trump Administration model.

For the equity market, the fear of tariffs has fallen away a little. It would appear as though the market has become comfortably numb. However, with Trump saying over the weekend he does not need to strike a deal and increasingly the Chinese appear more reluctant to meet with the Trump administration then a stand-off becomes a reality. What markets have to now concern themselves with is not so much the size of the tariffs, but rather the size of the good and the tariff applied.  And that’s especially relevant for the euro and dollar.

U.S. stocks ended the day pretty much unchanged.  However, the movers on the day were financials and these ran up hand in glove with bond rates.  For the rest of the market, tariffs were somewhat of a sticking point. Financials were up 0.7% on the day. The equity market can look forward to the clean-up of Florence. Insurers should be able to hike premiums.  Builders will be needed to repair flood-damaged houses and infrastructure once the water recedes. Duke Energy had a reservoir collapse as a result of rain and flood.

And on a day that saw a few gyrations, ex-Fed Chair Yellen commented that the Fed was facing a challenging environment trying to keep the recovery on track and inflation in check with full unemployment.  Boston Fed Rosengren followed up on Yellen’s comments and suggested in his paper to the Brookings Institute that the Fed was bad at handling ultra-low unemployment rates and these periods were followed by recessions.

The ECB’s Villeroy fired a warning shot on Friday suggesting that shadow banking and emerging market debt were major problems. The shadow banking system in Europe is in the order of $49 tr in assets and this is about 40% of the bloc’s financial system. (European Systemic Risk Board)  Villeroy also commented on corporate and household debt as 190% of worldwide gross e product in 2001 and is now in the order of 240%. Sobering numbers indeed.

However, for markets, the issue is Trump and his view on trade. The main foe of Trump, the Chinese, appear to be cooling to the idea of holding talks relating to trade with the Trump administration partly in frustration and partly because now it does not suit the Chinese. Trump’s ploy of saying there is a deal and then not a deal is a common Trump negotiating tactic.  And like his business endeavours, one never knows the terms of the deal because the details constantly change. That’s why there is the possibility of stormy weather ahead.

The Chinese appear to have inked a major trade deal with the Russians, North Korea and a number of other satellite states. Upsetting the Chinese will only make the Chinese more resolved to continue to trade with the pariah states of North Korea and Iran and others. This outcome is not what the Trump administration wants or even sees as a possibility but currently looks highly probable.

For equity markets, this uncertainty will have a flow-on effect.  Retailers such as Walmart will be affected, farmers will see incomes fall as demand for soya bean falls. Many aspects of the U.S. economy would be hurt by wide-ranging tariffs. Auto-manufacturers would certainly be hurt. The likes of GM sell a higher proportion of cars in China than they do in the U.S.  Any soft embargo by the Chinese would seriously hurt GM. Trump has to sell his tariffs that’s a political need.  Whether he can do that and not hurt the economy that’s a different thing altogether.

Market Recap.

Equities: The S&P rose 0.03%. The Dow rose 0.03%. The Stoxx 600 rose 0.4%. The Vix closed at 12.07.

Currencies: The Bloomberg Dollar Index rose 0.3%.  The euro fell 0.5%.

Bonds: The ten-year closed around at 3.00%. The 2-year closed at 2.79% and the 30-year closed at 3.13 %. The ten-year bund closed at 0.45% and the OAT closed at 0.767%. The U.S. curve closed on the day with the following closes 2/10 at 21 bp, 2/30 at 34.5 bp and the 10/30 closed at 13.3 bp. The U.S. 5-year closed at 2.905%.

Commodities: WTI rose 0.5%.  Gold fell 0.6%.

Bitcoin is trading at around $6495.

Aussie Market Today.

Aussie equities are likely to be weaker on the day as concerns over trade and tariffs mount. Commodities could come under pressure and any fall may be reflected in the equities market. The weaker currency is offsetting some falls in prices.

Bonds may be in for a risk-off day again. With the looming storm of tariffs, bonds may once again be a safe haven, especially as bond yields have backed up some 10 bp or so over the past week. Look for improvement. Offshore buyers have also been participating taking advantage of the higher yields.

The Aussie dollar improved for a while but is now retreating in line with commodities.

Geopolitical risks remain high.