Looks like Trump got his way with trade relating to Europe. Both Trump and the EU’s Juncker agreed to work towards eliminating trade barriers and Trump agreed not to tax cars whilst the detail is being worked. Europe agreed to more purchases of services, soybeans, LNG whilst reducing barriers to services, chemicals and pharmaceuticals. For the moment whilst the trade talks are being discussed tariffs will not be introduced. This is for the moment a strong risk on move.
Not all was good, however, for the bond market. Unlike the equity market, bonds thrashed around a little. Bond yields rose as the prospect of slowing economic growth lessens. The Treasury sold $36 bio in 5-year notes to strong demand. The trade talks are seen as a positive for credit spreads on automakers such as Volkswagen, BMW and some Japanese and Korean car manufacturers.
For the risk on traders, however, not all is good. Several indicators are worth thinking about. High yield is causing some shudders. Global high yield bonds have seen their yields rise the most since March and the market saw outflows of $1.8 bio in just two weeks. (Lipper) It is worth considering that the wobble of 20% correction to equity markets in 2015 was caused by a collapse in junk bonds.
Another popular indicator is the Yardeni Index. The Yardeni Index is a boom bust index and divides the CRB industrial raw materials index by the 4-week moving average of U.S first-time claims for unemployment benefits. The premise is that if industrial raw materials are rising then the outlook for growth and equities is constructive.
When the S&P is overlaid with the BBB spreads then the outlook is a reliable coincidental indicator for U.S. equities and currently the indicator is showing a positive outlook. Confused? Yes, I think we all are because so many indicators are pointing in different directions. And then of course we have the flattening U.S. yield curve.
Wall Street had a great day on the back of Trump’s victory. Facebook caused a shudder with a disappointing quarterly report. Facebook slumped 23% on the back of its result in the aftermarket. General Motors slumped 4.6% after it released its profit forecast citing higher costs due to tariffs. Volume on the exchange was strong. Of the 148 S&P 500 companies that have reported to date, 85.8% have beaten analysts expectations.
Equities: The S&P rose 0.9% The Dow rose 0.68%.
Currencies: The Bloomberg Dollar Index fell 0.5%.
Bonds: The ten-year closed around at 2.97%. The 2-year closed at 2.67% and the 30-year closed at 3.099%. The ten-year bund closed at 0.329% and the UK gilt closed at 1.27% and the OAT closed at 0.629%. The U.S. curve closed the day with the following closes 2/10 at 30.2 bp, 2/30 at 43 bp and the 10/30 closed at 12.7 bp. The U.S. 5-year closed at 2.855%.
Commodities: WTI rose 1.1%. Gold rose 0.11%, and copper rose 1.37%. The Bloomberg Commodity Index rose 1%
Bitcoin is trading around $8205.