The Trump Factor.

A fall in rates may be needed to appease Trump. And with such a fall, the credibility of the Fed as an independent central bank would diminish. You see, the Fed already is stacked with Trump nominees and with a further two more to come one worries about how these new appointees will react if Trump shows his displeasure. More importantly, it will be interesting to see how the bond market will react should it feel conned.

Trump tweeted Friday that the Fed should ease to maintain growth. With little inflation and the ability to add jobs, the U.S. economy appears to be in fair shape and Trump probably has a point. On the back of Trump’s comments, the yield curve flattened and staged a small rally.

Interestingly, the probability for an easing that was so prominent last week has, well, become confused. Certainly, the prospect of a hike is almost negligible at this point, but the enthusiasm for a cut has also changed. For the bond market, the big plus on Friday regarding the employment number was that wage growth has slowed. The inflation genie is definitely still in the bottle.  This week will see $78 bio of issuance in 3-,10- and 30-year bonds.

The stock market doesn’t care, it sees continued growth, low inflation, and a rosy outlook. Stocks as of Friday have now rallied seven consecutive days and that’s the best run since 2017. Global stocks have also enjoyed a better outlook as trade talks between the U.S. and China have an improving tone. Perhaps a compromise can be reached; both actors need a win. President Xi Peng is pushing hard for a conclusion.

On the data front, payrolls rose 196,000 in March, wage gains eased and unemployment is hovering near a 49-year low.

The banks report on Friday and expectations are that they will report falling earnings. This is partly as a result of low interest rates and a flattening curve. In fact, this view is also a market wide view of other sectors.  Since December the S&P has gained 13.1% its biggest increase since 2009. However, since October analysts have revised their expectations for 2019 earnings down by 8.1% (March quarter) and a YOY decline of 2.2%.

Whilst the U.S. is the main story, Europe has yet another make or break week ahead. ECB policy is on the agenda this week and the deadline for the UK to leave the EU appears to be up in the air. Any concession May makes to the opposition Labour Party will lose Conservative MP votes in Parliament. Deep divisions remain.

West Texas crude has now strengthened above $62 a barrel, and this is its 5th straight weekly advance.

Bitcoin is trading above $5,000 and the reasons for its sudden surge are various. The theory that has the most currency at present is that the momentum or algo traders have let loose their programs on bitcoin.  The interesting point will be when these investors exit as the exit won’t be orderly with everyone heading in the same direction.

On the U.S. security side, Kirstjen Nielsen will be stepping down as Secretary of Homeland Security just two days after touring the U.S. southern border with Trump.

Market Recap.

Equities: The S&P 500 rose 0.46% and the Dow rose 0.15%.  The Vix closed at 12.82 while the Stoxx Europe 600 Index rose 0.1%.

Currencies: The Bloomberg Dollar index gained 0.2% and the euro rose 0.1% while the pound fell 0.3%.

Bonds: (as at 4.30pm). The ten-year is trading at 2.499%. The 2-year is trading at 2.343% and the 30-year is at 2.905%. The U.S. curve closed on the day with the following closes 2/10 at 15.2 bp, 2/30 at 56.0 bp and the 10/30 closed at 40.6 bp. The U.S. 5-year closed at 2.309%. The 2/5 spread is now -3.8 bp. The ten-year bund closed at 0.008% and the British gilt closed at 1.117%. The 10-year yen gilt is trading -0.031%.

Commodities: WTI rose 1.9% while Gold was flat.

Bitcoin is trading at around $5,163.


Aussie Market Today.

The rally in equities is likely to continue. As fears diminish then risk off trades will become more prominent. Look for a reasonable rally on the day.

Bonds will struggle on the day. If equities rally, then bonds should stall. However, as bonds were sold Friday and with a slight rally in the U.S., then bonds could stage a small rally. The extent of the equity rally will be determined by the strength of today’s equity rally if there is a rally.