What tariff?

Equity markets once again have that warm afterglow of one that is satisfied. Fearing neither Trump’s tariffs nor the Chinese tariffs, equity markets staged yet another rally whilst bond yields held steady at the recent highs. Curve steepeners for the best part have worked nicely.  And all one can ponder is that all the talk around tariffs for the moment has been largely dismissed. There is nothing to fear.

The U.S. equity market rallied because banks are expected to do well from rising interest rates and perhaps a steeper yield curve. Utilities were weaker as concerns mount over rising interest costs. Shares of both Boeing and Caterpillar rallied because the Chinese suggested they won’t use the yuan as a weapon and devalue the yuan in response to the tariffs. Grocers retreated on a report that Amazon was considering to open as many as 3,000 cashierless stores.

For many investors, the tit for tat war of words has started to wear thin. Optimism prevails and views over what could be affected and which companies have largely been formed. Brexit remains a key issue in the months ahead, a negotiation with Canada still must be resolved. The real issue moving forward will be has there been any impact on global growth?

Whilst talking trade and all that is good in the world, shipping rates have plummeted as a result of talks over tariffs. The cost of a capsize vessel (haul iron ore and coal) is down 39% and hedging contracts in the fourth quarter are down 11%. I say this because shipping is an observable and a forward indicator for economies. These rates may be transitory but it is worth noting.

Bonds have now moved into interesting territory and there are a few observables that catch ones eye. The greenback (dollar) is responding to twists and pitches in the yield curve with the correlation between the Bloomberg Dollar Index and 2-3-year treasuries strengthening. A flatter yield curve has seen the dollar weaken whilst a steeper curve is seeing the dollar strengthen as we have seen today.  Much of the movement in dollars appears to be correlated to the yield curve movements.

Today treasuries hit a fresh four month high and are nearing levels not seen since 2011. The market fully expects a tightening next week but of more importance will be the future guidance provided by the Fed. The direction is clear, it’s up but it is more a case by how much and how quickly and what nuances the Fed is looking at. What we have seen today is repricing and as more risk is being taken treasuries are likely to continuing falling prices (higher yields).

Treasury prices are falling also as a result of corporate pension fund demand. This is largely technical but has been important in understanding the movements. Contributions to pension funds surged as companies sought to take advantage of the tax rates by deducting old contributions at the higher rate of 30% prior to the expiry on September 15. As pensions become better funded, they shift holdings from equities into debt, raising demand for high quality longer dated bonds.  And that’s what we have seen earlier in the month with the month of September to date seeing some $124 bio of IG issuance. Currently, this ranks in the top 5 months of issuance. Who would have thought?

And on this day it is rather odd that Italy (Savona Economic Minister) wants public debt of all EU states brought below 60% of gross domestic product. Savona is looking for more powers to enable the ability to influence exchange rates. This all is a little surprise given the Italian public debt is 132% of GDP and the coalition has some ambitious spending plans.

In other news, the first blockchain exchange platform for commodities has been launched. The exchange called Komgo SA will be based in Geneva. The founders include ABN Amro, BNP, Citi, Credit Agricole, Gunvor, ING, Koch Supply and Trading, Macquarie, Mercuria, MUFG Bank, Nataxis, Rabobank, Shell, SGS, and Societe Generale.

Kmgo will first be used for crude and is expected to broaden to other commodities. The blockchain uses a shared database that updates in real-time and can settle transactions in minutes without the need for third-party verification. A high speed ledger updates in real-time and avoids a mountain of paperwork between a number of parties. A trader will use a digital letter of credit.

And just in case you have forgotten, the negotiations to raise the debt ceiling is looming large towards the end of this month. The GOP have a lot to work on given the midterms occur in November. And any slip-up could spell disaster given there is real concern about the direction of polling. Expect Trump to be a little more outrageous as he looks to score some victories. Hang on folks because this could be fun to watch.

Market Recap.

Equities: The S&P rose 0.1%. The Dow rose 0.61%. The Vix closed 11.75.

Currencies: The Bloomberg Dollar Index fell 0.1% and the euro rose 0.1%.

Bonds: The ten-year closed around at 3.063%. The 2-year closed at 2.795% and the 30-year closed at 3.21%. The ten-year bund closed at 0.485% and the OAT closed at 0.80%. The U.S. curve closed on the day with the following closes 2/10 at 26.8 bp, 2/30 at 41.5 bp and the 10/30 closed at 14.6 bp. The U.S. 5-year closed at 2.948%.

Commodities: WTI rose 1.9% Gold rose 0.4% and the Bloomberg Commodity Index gained 0.8%.

Bitcoin is trading around $6,437.

Aussie Market Today.

Equities should see another up day. With fears dissipating around trade, equities can rally. Our next point for markets will be global growth and the impact on growth from the tariffs. With the Vix declining and similarly in Australia, fear is evaporating and that is conducive to higher markets.  As always, watch for commentary around tariffs and China.

Who loves a bond? It appears as not too many. This time last week investors were piling into bonds in risk off trades.  Now those investors are seeing some losses mount in their portfolios. Nothing serious just yet but with returns looking negative for the month, bonds could mount another sell off. Economic indicators will be important for the next few weeks.

The Aussie dollar improves as the tone for commodities improved. The Aussie appears to be on a roll. And that could last for a while yet as China is looking to keep its economy growing.