A Trump Day Keeps The Market Away
The day started in much the same manner as it has for the past month. Equities tried to rally some, commodities rallied whilst others softened and a chastened bond market continues on its D’oh path.
In play is Trump and his isolationist views and the Fox media egging Mr Trump on with what can best be called stirring propaganda. The Fox News waxed lyrically over the success of Trump in Europe and how he told those so and so Germans what he felt about their trade policies and how those policies were disastrous for the USA. Then we are led to believe he has the most wonderful relationship with Merkel after spending a good portion of his time in office belittling her and the German people. One day the piper will have to be paid and it won’t be pretty.
Markets are now having a good look at the Administration and it appears as though the Trump trade is fading fast and that is because of a number of reasons. The Fed will hike in June and the Fed is also looking to run down its $4trillion of holdings. Even a small amount that is no longer bought by the Fed will be equivalent to a tightening. If one believes the Fed will go in June and the probability of a Fed Funds tightening is now about 87%.
The next factor that investors are looking for is growth. There is little evidence of the U.S. growing above 2% and political as well as budget uncertainties are driving those concerns. Trump for all his posturing looks to be a lame duck and so too his Administration. Talk comes cheap and policy requires thought. The Budget looks unlikely to pass for the moment and tax offsets something the Administration gave no thought to is just another major headache. To blame the Democrats is Trump’s escape, however the Republicans must remember they have the Presidency, the Congress and the Senate. How hard can it be if good policy is proffered up.
Growth rates are a problem. With the Administration targeting 3% growth this number looks unachievable. The equity market bet on Trump’s tax cuts but these words seem hollow. Europe is growing at what looks like 2.5% and CEO’s are likely to start thinking about investing in Europe rather than the USA. After all business likes to move to where the growth prospects are. This is where it now gets interesting. If for example Trump starts to bully German car manufacturers and these same manufacturers are building solid brands in China, then they could be tempted to concentrate on Asia and elsewhere. That would open the door for the Europeans to start taxing U.S. corporations or for that matter if trade tariffs have been imposed, make it difficult for U.S. companies to compete in Europe.
Another factor is that the first quarter earnings results were good however the signs of a slowing economy are there for all to see. Falling truck sales, significant falls in second hand trucks, falling motor vehicle sales, falling freight rates are all signals that all is not good with an economy. Retail has not recovered with the exception of a couple of businesses. Oil is holding steady to slightly down hence the profits this time around won’t be a as strong. Trading volumes for Banks appear to be waning still so the balance sheets of the investment banks and the big four will be stretched.
And the biggest factor is uncertainty. CEO’s and CFO’s simply will not invest when there is uncertainty. In contrast EUROPE is providing policy certainty. Trump for all his bluster provides major uncertainties and with key advisers under FBI scrutiny will become even more distracted.
On the day equities retreated a little. Energy stocks and financials were the cause of weakness. Volatility remains low and so too turnover. We had a couple of Fed Governors today commenting on markets. St Louis President Bullard chastised the incumbent Administration commenting that the Administration needs to fulfil the expectations that have driven equity markets higher.
The Bloomberg Dollar Spot Index was little changed. The index is hovering close to its lowest level since November.
Oil fell to close at $49.66 a barrel. It appears as though the backlog of oil held and increased extraction in the U.S. is hurting the oil price. Copper drifted lower as traders await the Chinese factory data. Aluminium was down 1.3%, Zinc was down 0.5% whilst tin and nickel rose slightly.
Bonds rallied. The U.S. 10-year treasury closed at 2.21% and the b2 -year at 2.286%. The curve flattened with the 2/30 closing at 158.70, the 2/10 closing at 92 and the 10/30 closing at 66.5. The French 10-year closed at 0.723% and the bund 10-yearclosed at 0.723%. Fed Governor Lael Brainard (no longer a voting member) commented today that “the failure to get inflation back to 2% target is a source of concern”. With the way, the bond market is behaving a solid slowdown appears to be quite likely. It is only a matter of time before the equity markets stir.
The Aussie Market Today
Depending on the factory data in China I expect that equities should drift lower. The direction of the U.S. is to drift lower and this will probably be the case on the day.
I expect bonds to be stronger. Why? Because the U.S. was lower and we are following the U.S. lower in yield. There is a real danger that Australia could be slipping towards recession as the Chinese economy is slowed. Overseas investors and in particular, the Central Banks are buying the Australian Bonds and this is helping to hold the currency. How long it remains this way is hard to know but the Triple A rating is the main reason. Today the U.S.-10 year Aussie spread is 18 points. The last time we were in this territory rates were a lot higher and the Aussie dollar was in the 50’s.