IN VOGUE! Trump promises fuel market optimism

That’s exactly what the equity market is reacting to. All those wonderful promises made by Trump once again are fuelling market optimism and driving equities higher albeit in smaller ranges and tighter price gains.

The equity market is rallying because just maybe the GOP can get its act together and pass some of its own bills. The driver for the equity markets is not infrastructure its lower taxes and like the Yale study suggests. Market optimism is being directed towards higher payouts, share buybacks and little capex. The Country needs capex if it’s to overcome stalling productivity and wage gains.

Inflation or rather concerns about inflation are not high. Recent data suggests that consumer spending fell 0.1% in August. That’s the first decline since January. Personal consumption rose 0.1% in August and inflation remains well contained. In a break for markets, it is starting to look increasingly likely that Yellen will be replaced and that her replacement will likely raise rates.

So far, we know that Kevin Warsh a former Governor and Jerome Powell have been interviewed and both are viewed as being hawkish. Warsh is seen more likely to raise rates than the others. Bonds have reacted accordingly and since Friday have run up a few basis points. However, any weakness is now being seen as a possible buying opportunity by some. The bond market is somewhat sanguine about Trump and the GOP being able to achieve too much by way of policy.

Meanwhile Trump is copping a fair bit of flack over the handling of Puerto Rico’s dilemma. Electricity and services are down to over 80% of the island state and aid is urgently required. Trump has acknowledged the criticism as being Democrat inspired. In fact, he is doing a wonderful job in getting aid there. At least that’s what he said when he was dedicating the President’s Cup to the winner at his golf course yesterday.

U.S. construction spending rebounded in August after two straight months of declines. Construction rose 0.5%. The ISM rose to 60.8 in September up from 58.8 in August. This number will spur some concerns in the bond market.

Overall, bond market sentiment remains somewhat cautious. However, if the GOP stumbles again on tax reform then bonds can rally. Trump’s new appointee to Chairman will also dictate sentiment.

And a small prayer for those affected by the violence in Las Vegas. It will be interesting to see how the NRA claim this piece of domestic terrorism. Importantly, gun sales will rise as a result of fear instilled by the NRA. A gun never hurt anybody but then again neither did a missile or an atom bomb until they were either launched or detonated.  These deaths are not something the GOP can idly walk away from. The GOP has to take some responsibility for being the sponsors of easily available weaponry. Interestingly, even though the shooting are of a mass nature, the White House nor the Police Authorities have been quick to not call this act as an act of terrorism.

Market Recap:

Equities: hit a new high. The S&P 500 climbed 0.4%, the Dow rose 0.68%, and the Stoxx 600 rose 0.5%

Currencies: The Bloomberg Dollar Spot Index rose 0.5% the euro fell 0.7% and the pound fell 0.9%.

Bonds: held steady, in response to uncertainty in Europe caused by the illegal referendum in Catalonia, Spain and the shooting in Las Vegas. Some concern is being expressed by traders over the next Governor of the Fed and the willingness to raise rates. The probability of rate hikes in December 2017 has increased to 68.5% and in June 2018 is now 86.2%. The U.S. bond curve flattened slightly with the 2/10 closing at 85.2bp, the 2/30 at 138.2 bp, and the 10/30 closed at 52.8bp. The treasury closes were 2 -year closing at 1.487%, the 10-year at 2.34% and the 30-year at 2.87%.

Commodities: Gold fell 0.6% and WTI fell 2.1%. Zinc rallied to a 10-year peak a gain of 2.3%. Lead rose 1.3%, aluminium fell 0.1% and copper rose 0.2%. Most of the movement in base metals is being caused by the Chinese crackdown on pollution with factories being required to reduce production as we head into the winter months.

Aussie Market Today.

Expect equities to be stronger on the day as equities take their lead from the U.S. and Europe. Bonds will continue to soften as bond investors mull over the likelihood of increasing bonds elsewhere. Credit bonds are likely to improve as increasing equity markets will lead to demand for corporate securities. Fixed rate securities are likely to suffer from any rise in rates whilst floating rate securities will benefit from increasing rates as coupons will increase over time.