Like a world champion boxer entering the ring, Trump strutted to the podium to deliver his speech to the UN. Trump reasserted his America First slogan, offered a blunt rejection of multilateral ties (even though the U.S. is dependent on those ties) and then declared to the audience, “My administration has accomplished more than almost any administration in the history of our country”. Unfortunately, his comments drew a lot of laughter and mirth and that laughter was at Trump not laughing with him.
Trump outlined his strategy, he did the dance and like Lil Kim made a lot of comments that simply were unsubstantiated rhetoric. Within his speech, he lambasted the International Criminal Court (many dictators would agree), complained that the U.S. allies were getting a free ride, slammed China and attacked OPEC for not making up the shortfall in oil production after the U.S. imposed sanctions on Iranian oil. Trump certainly aired his grievances.
But what does this do for the world view of the U.S.? Not a lot. U.S. diplomats must cringe when the world laughs at their President, not with him. The more Trump remonstrates, the more he loses. It’s good for his electorate but moving forward the isolationism will only hurt. In a global economy, it is difficult to go it alone. Just ask North Korea.
So what did markets think of Trump’s antics? Probably not a lot, markets probably were not even listening. Geopolitics will certainly drive markets in the near term. However, for the moment, most participants are more concerned about the China tariffs and China’s response.
The U.S. equity market was mixed. Automobiles and utilities slid whilst tech continues to run up. Industrials also slid on the day with drillers riding the sugar hit of Brent oil above $80 and posted $81 a barrel. The equity market is keen to know the Fed’s actions over the rest of the year, whether there will be two further hikes or just this single one in September. Energy stocks rose whilst financials slipped. Buoyed by growth, the S&P500 has gained 9% year to date, but 5 sector indexes are down year to date. Consumer staples are down 5.6%. Six sectors led by technology are up 19%.
Also of concern is what happens to the Deputy Attorney-General Rosenstein. Does Trump fire him or do the two reach an accord and he stays? The betting is that Rosenstein goes, and if he does, does that spark a Constitutional crisis? That’s what is affecting the U.S. equity market at present.
In Europe, the stage is set for a bond sell-off. As the various economies pick up, the pressure will mount on the ECB to begin a tightening phase. With Greece, Spain, and Portugal now going well, interest now lies with Italy and the soon to be announced budget. Bunds are now tracking 0.54% (10-year). The curve is in a bear steepening mode and the 10’s look like they can head to 0.6% in the near term. The Italian/ bund spread (10 year) can possibly track back to 212 and the Greek/ bund trade is now looking to trade down to 341bp as 4.02% holds and the market hunts 3.95%.
However, within all of this, the FOMC meeting tomorrow is the one to watch. But there are a number of signals to watch for those who are trading the bonds. The 5-year auction was set at the highest level in a decade, and investors are net short in a 4-month low according to the JPM weekly survey. The benchmark 10-year traded to a high of 3.113%, the highest since May. The 5-year touched 2.99% last seen in June 2009.
Net shorts in the longer maturities fell to 2%, the lowest level in 4 months. The 2-year auction saw the notes yield 2.829%. This is the highest level since June 2008 and also the weakest demand since December 2008. Indirect bidders took 39.96%, the lowest since May 2018. The ratio of bids to offer was 2.44, the lowest since December 2008.
As demand for bonds slides, yields must inevitably rise. How far? Well, that will be determined by broader economic factors such as GDP growth, demand, productivity, and inflation. A stumble could see rates and yields a lot higher. Rhetoric and self-belief won’t get the economy out of a mess should a stumble or a crisis arise. The economy is primed.
Of concern for traders is the deluge of supply and this is causing the arbitrage play between off-the-runs and on-the-run treasuries to peter out. With no premium, traders are holding them off the runs making it harder to trade treasuries and thus liquidity is suffering.
Net issuance since October 2017 now totals $1.06tr, the most since 2012 and is expected to grow further. Trump and the Treasury desperately need the economy to grow at a level above 3% and see a productivity rise otherwise this deluge could turn out to be a massive millstone for the U.S.
Equities: The S&P fell 0.1%. The Dow fell 0.3%. The Vix closed 12.2. The Stoxx 600 Index gained 0.5%.
Currencies: The Bloomberg Dollar Index fell 0.1%. The pound rose 0.5%.
Bonds: The ten-year closed at 3.098%. The 2-year closed at 2.843% and the 30-year closed at 3.227%. A slight flattening today. The ten-year bund closed at 0.544% and the OAT closed at 0.859% (a level seen in January earlier this year). The U.S. curve closed on the day with the following closes 2/10 at 25.3 bp, 2/30 at 38.3 bp and the 10/30 closed at 12.8 bp. The U.S. 5-year closed at 2.983%.
Commodities: WTI gained 0.3% and Brent went through $81 a barrel. Gold rose 0.2%. Silver was up 1.33%.
Bitcoin is trading around $6,382.
Aussie Market Today.
Equities slipped overnight and are most likely to do the same in Australia. FOMC is tomorrow so that may mean that equities hold steady on the day. Trade remains a concern.
Another choppy day for bonds with yields likely to push higher. At higher levels, there appears to be interest.
The Aussie dollar will once again be beholden to views on commodities. With a possible increase in rates tomorrow in the U.S., the Aussie may slide if rates in Australia do not move a little higher. Weakness against the dollar is possible.
Geopolitical risks remain high.