In his head.

When the Cranberries penned Zombies, the line in “in your head” – they were not referring to President Trump’s comments about the trade deadline with China, but in some ways the line is prescient. Because right now the Chinese Administration must be thinking, what is next? How do you meet a deadline when the only person who knows is Trump?

Accordingly, the markets reacted with stocks falling and tech stocks slumping. In a somewhat fragile market, optimism is on the wane.  The good news is that inflation remains under control and trade policies are holding the economy in a steady state and the Fed can now deliberate over the what next move. For the moment, trade and the Fed appear to be balancing each other. How long this remains is anyone’s guess, but it does create uncertainty. And with uncertainty comes risk off trades.

For the day, stocks were not as down as they may have been because traders are thinking rate cuts. One worrying sign was in energy stocks. Energy stocks fell as the oil price collapsed 4% and the energy sector was down 1.4%. The consumer price index rose 0.1% and that was in line with expectations. Trade concerns are driving the weakness.

The Philadelphia Semiconductor Index was down 2.3% as stocks that derived sizable chunks of revenue from China fell. In another development, Huawei said they would start to ask for royalties from patents they hold. Verizon uses some 200 odd patents held by Huawei so watch that developing story. Volume on the exchange was light.

The treasury curve steepened on the day as the two-years staged a neat rally post the consumer price index result. Two-years rallied 3 bp and the curve steepened a couple of points. A July rate cut is now at a 69% probability and the probability of two cuts by July is now at 17.2%. Quite remarkable. On the day, the 10-year auction was in line with the average and was sold at 2.13% the lowest it has been since November 2016.

For now, traders will be headline watching.

Elsewhere, Spain auctioned off their 10-year and saw bonds sold at a record low. The 10-year went at 0.629% with the 10-year rallying 1% this year. Strong demand from offshore for the issue was the prime reason for the great result. The last 10-year issue which was in January went at 1.62%.
The ECB added some fuel to the markets as well by saying they were prepared to act if the the economic downturn worsens.

The Rant.

Once again, the debt ceiling is raising its head. This time though even Republicans are starting to worry. Mitch McConnell is urging the White House to limit spending as the fiscal situation worsens and set a debt limit that Democrats will agree and accept.

McConnell convened a meeting on Wednesday in an attempt to avoid another government shutdown and relieve market uncertainty. Trump stands to lose the most if some agreement is not reached.

With just on 3-months till the September 30 deadline, the annual budget process has hardly commenced. The first package of 12, starts this week with $1 tr of spending and includes some Defense items.

McConnell is eager to broker a deal that would increase the $22 tr U.S. borrowing limit. Without an increase, the Treasury would start to default on U.S. payment obligations.

What the U.S. really needs is a good dose of inflation to get themselves out of a deep trench. At some point, however, the bond market will take a caustic view of the indebtedness. However, for the moment, with interest rates set to fall further and a sluggish economy, the bears will have to bide their time.

Germany is in a pickle. Trump is threatening the Germans with sanctions if they proceed with the Nord Stream 2 pipeline. Trump’s concern is that the Russians would then be able to hold Germany captive with Trump suggesting that his actions will save Germany billions.

What Trump would like to see is uptake of U.S. Freedom Gas. The gas comes from the U.S. shale basins.  Trump argues that Europe would be better off buying U.S. gas rather than Russian gas and oil.

Market Recap.

Equities: The S&P 500 fell 0.2%. The Dow fell 0.17%.  The Vix closed at 15.91. The Stoxx Europe 600 Index fell 0.3%.

Currencies: The Bloomberg Dollar Index rose 0.3%.

Bonds: (as at 4.30pm). The ten-year is trading at 2.122%. The 2-year is trading at 1.883% and the 30-year is at 2.618%. The U.S. curve closed on the day with the following closes 2/10 at 23.7 bp, 2/30 at 73.4 bp and the 10/30 closed at 49.5 bp. The U.S. 5-year closed at 1.874%. The 2/5 spread is now -1.1 bp. The ten-year bund closed at -0.235% and the British gilt closed at 0.871%. The 10-year yen gilt is trading -0.114%.

Commodities: Crude fell 4.2%. Gold rose 0.5%.

Bitcoin is trading around $8,144.

Aussie Market Today.

Stocks probably will be a little weaker on the day. However, there is a growing consensus that the market is starting to become quite expensive and investors are beginning to question valuations and especially so in a weakening economy.

Once again, it’s all about trade and uncertainty of trade and the impact on the global economy. Bonds look likely to continue the rally in the absence of other news. However, given Trump’s increasingly aggressive stance on trade its hard to see the direction changing away from risk off.

Credit continues to be bid and especially so in the shorter maturities. Credit was a little wider on the overnight indexes, but the general direction remains on the bid side.

On the day, I expect credit to be better bid and especially so in the shorter maturities.