Oh, what a day.

Trump certainly knows how to shock a market out of its comfort zone and that’s what his Sunday tweets managed to do. It knocked the stuffing out of markets for a while at least.  Asia was down but so too grain markets. Soybean and corn futures slumped to the lowest levels since 1977 (Bloomberg Grains Subindex Total Return did). July soybean futures slumped to a record as soybeans were one of the commodities hit hardest by Chinese tariffs on U.S. agricultural products. Soy was down 3%, corn was down 4.1% and wheat was down 2.3%.

For the farmers, the talk of a trade resolution gave hope. But Trump’s Sunday night tweets started the nightmare again. Farmers also have to contend with falling Chinese demand for soymeal as African Swine fever bites the piggeries. China has culled some 1 million pigs in an attempt to eradicate the Ebola like virus and this means less grains required to feed pigs.

The farmers are taking blows and the hedge funds are increasing their short positions. For the U.S. economy and for the Midwest farmers, trade has a massive impact. And for the farmers, their finances are tightening. Trump needs a resolution soon or his mid-west supporter base may look elsewhere.

For stocks, today was brutal. Blink and you could have had a really, really, bad day. Stocks were down at one point 450 points before paring back those losses to be only down a little. The turnaround came in the form of the news that the Chinese delegation will still attend this Wednesday’s trade meeting. The stock market still believes that the Trump tweets were a negotiating stance and that a resolution will be forthcoming. And that’s the primary reason for the recovery in stocks as the afternoon wore on.

For the markets, the prospect of increasing tensions over trade created the division and we saw that show itself as a risk off day. The three things that have been pushing stocks higher came under pressure today. Those being the pivot by the Fed, better than expected earnings and a trade deal.

Bonds performed on the day and it will be interesting to see if that performance continues into the week. The rally in the treasuries sets up Tuesday’s Treasury Department’s auction. The Treasury will sell $84 bio of debt this week with $38 bio issued in three-year notes on Tuesday, $27bio of 10-year notes on Wednesday and $19 bio of 30-year notes on Thursday. Some caution may be noted later in the week as we see the release of the government’s consumer price report Friday.

Demand for the notes should be expected as lower issuance and normalisation will see a lower net supply of treasuries (already advised) and a gradual steepening of the curve may be expected. Supply reductions in response to higher Fed reinvestments should skew the shorter maturities. The Fed is also injecting liquidity into the front end of the curve particularly in the standing repo facility.

Amongst this backdrop of uncertainty, the U.S. high yield market is expected to see a number of issues. Up to nine issuers are expected this week.  And even the more challenged names are expected to see a bid. Such is demand. If that’s the case, then risk off for equities will only be transitory.

Supply is running at $80.61 bio on year to date which is slightly below $83.76 bio for the same period. Average spreads are 159 bp tighter and are currently tracking around 374 bp to treasuries. Triple C’s returned 2.74% for April, and single B’s returned 1.514%.

The Rant

Within the recent minutes of the Fed there was a note relating to debt relating to business. The Fed continues to escalate their concerns over lower rated debt (junk) and the significant tightening of spreads with little regard to risk reward.

The Fed points to the increase in leverage lending issuance up 20% and the falling protections typically available to shield lenders from default. This is a vexed issue and its just not the Fed that is warning markets. Lawmakers, the IMF and other Central Banks are also sounding the alarm.

Of concern is the slippage in credit standards and that loans to firms in the high yield debt sector now exceed the peaks of 2007 and 2014. Default rates remain low but that’s simply a function of very low interest rates globally.

For investors, the problems begin as many of these products have found themselves in CLO’s and its this risk of unexpected losses that has the regulators on edge. Over the last few years insurance companies have invested heavily in these products as they attempt to get their returns higher.

Last year the Trump appointed Regulators gave guidance that banks can compete with non-banks with little regulatory oversight, and banks have been underwriting some of the riskiest loans in an attempt to win market share.

Market Recap.

Equities: The S&P 500 fell 0.45% and the Dow fell 0.25%.  The Vix closed at 15.44 while the Stoxx Europe 600 Index fell 0.9%.

Currencies: The Bloomberg Dollar Index gained 0.2%, and the euro was flat. The pound slumped 0.5%.

Bonds: (as at 4.30pm). The ten-year is trading at 2.50%. The 2-year is trading at 2.309% and the 30-year is at 2.908%. The U.S. curve closed on the day with the following closes 2/10 at 17.40 bp, 2/30 at 59.3 bp and the 10/30 closed at 41.5 bp. The U.S. 5-year closed at 2.293%. The 2/5 spread is now -3.2 bp. The ten-year bund closed at 0.006% and the British gilt closed at 1.221%. The 10-year yen gilt is trading -0.031%.

Commodities: WTI rose 1.3% and gold rose 0.1%.

Bitcoin is trading around $5,686.

Aussie Market Today.

Aussie equities will no doubt remain a little skittish. With the RBA meeting and with some expecting a rate cut anything could happen. Any major movements could be tempered by the election the following week. A Labor victory could impact the stock market.

I am expecting bonds to be steady. Risk off became kinda risk back on overnight but for Australia its about how Asia perceives China attending trade talks in the U.S. this week. The RBA are due to announce policy later today but probably fear the politicisation of a rate cut if they were to ease. The last cut was made in August 2016.

The RBA should choose to wait as the winner of the election will be spending on infrastructure and an expansion of fiscal policy. Expansionary fiscal policy may provide the economic boost that monetary policy has failed to spur. Credit pushed higher overnight with risk off. However, I expect that view to settle and we should see credit bid on the day as the equity markets slowly improve. Demand is still there for issuers with reasonable credit.

I don’t think there will be a rate cut but there are 25 out of 42 economists who believe that a rate cut is possible. But there are also a number who believe that by year end the interest rate set by the RBA will be 1%, implying that many economists are predicting a slow economy no matter who wins the election.

It is expected that the RBNZ will go on May 8.