Slip slidin’ away.

Equity markets took a tumble but equities were not the only thing moving. Oil rallied beyond $80 making the Russians and OPEC happy.  But the big news is that Rosenstein is meeting with Trump on Thursday to discuss his future. Rosenstein is the Deputy Attorney General and has kept the Mueller probe alive. If Rosenstein were to leave, one of Trump’s major boils could be lanced and the Mueller probe could possibly end.

Equity prices reacted to both the Rosenstein news and also to the China tariffs. And what is a market to do in this uncertainty?  Sell, of course.  What is intriguing in the equity market at present is the low volatility low correlation within the S&P stocks. This is partly a rotation into U.S. stocks because of global risks. Implied equity-price swings are trading at a premium to recent moves and relative historic correlations. Traders are building in cushions to protect from any upticks in volatility. The low volatility low correlation trades are usually associated with markets that are late cycle.

European bonds sold off on news that Draghi was starting to worry about inflation. That inevitably means that rates will start to adjust higher in yield in Europe. Geopolitical disruption is appearing again and investors are being warned or are already starting to adjust for uncertainty. JP Morgan, in its investment outlook, is starting to factor in phase 3 of the tariff war next year with all Chinese imports into the U.S. being affected by tariffs leading to weaker growth in China and weaker stock prices in the U.S.

The one thing that probably saved markets on Monday was that Hong Kong, Japan, and China were on a holiday, thus reducing volumes. We will get a better picture when these markets reopen. Indian shares and the rupee slipped as cracks start to appear in the non-bank financial sector. There is a warning here for China and also Australia. Both countries have seen a significant rise in the sector and both have their points of vulnerability.

Elsewhere, uncertainty prevailed. Jeremy Corbyn suggested he would support a second Brexit vote if the Labour Party were supportive.  This places additional pressure on Theresa May after she conceded that talks between the UK and the EU had hit an impasse. There is a possibility of a snap election in the UK.

The bond market is still receiving good interest. A large buyer of 2-years entered the fray today to hold the front end reasonably steady. There were three high-grade issuers on the day.  All were well received. There is an expected $25 bio of issuance due this week. There are a number of high yield deals this week also hitting the screens. A lack of issuance over the past few months should see solid demand. Envision, a large provider to physicians, is expected to issue $1.625bio and already has $500 mio preplaced with a cornerstone investor.

Forecasters are having a field day at present trying to soothsay where the bond market is heading. There is an expectation that the U.S. 2-year will rise above the longer dated maturities in about two years.  And this has many looking for a recession in about the same time frame. Reuters conducted a poll of 90 forecasters and most have interest rates for both the longer maturities and shorter maturities only rising a further 30bp over the next year. There is a belief that the long end is nearing its peak after the 10-years crossed back over 3%. According to the forecasters, the 2-year will hold around 3.14% and the 10-year around 3.30% with the curve at 17bp the flattest since 2007 a year before the collapse of Lehman Brothers.

Whilst still on the bonds, there is a lot of discussion around the holdings of U.S. Treasuries by various foreign central banks and what the central banks can do with their holdings now that the Fed is looking to hike rates. For many, they cannot sell because selling will only precipitate more pain and accelerate losses. Similarly just not selling and not reinvesting leads to the same result.

Global foreign reserves are about $7.3tr and most of those reserves are held by emerging market countries including oil producers. For example, Iran holds some $130 bio of treasuries. The U.S. Treasury market is $15.7tr and central banks hold $4tr of Treasury securities, $3.67tr in bonds. Current account surpluses are growing and these dollars flowed back into U.S. assets topping out in 2006 at 6% of GDP.

But the landscape has now changed. With tariffs looming and the Fed’s $3.6tr QE ending, the Fed is now in the process of allowing $50 bio to go unreinvested and that demand gap is $600 bio. Supply is rapidly rising with gross Treasury issuance topping $1tr on a monthly basis for the first time ever in August. Stuff to ponder. It may be that if the selling accelerates many countries may want to get out but cannot take the losses that would be incurred if they were to sell. Many investors may now be held captive.

When one talks about disruption then the copper market looks to have a potential disruptor in the Shanghai futures bourse. Recently, the State-owned copper companies threw their considerable weight behind the inaugural copper options contract on Friday and well the launch went off with a bang. It remains to see whether the volumes continue to rise. However, early indications suggest the Shanghai exchange will prove to be competitive. The first day of copper options trading showing greater depth than New York’s CME and rivaling the London bourse in the $270 bio copper market. On the day 18,000 contracts changed hands.  That’s six times the daily average for the CME and 70% of the turnover of the London Metals Exchange.

Germany’s government is thought to be favouring a tie-up of DB and Commerzbank to create a national lender that can reliably finance the country’s export-oriented economy. The country wants a strong domestic bank to keep funding German companies even during a financial crisis.

Market Recap.

Equities: The S&P fell 0.4%.  The Dow fell 0.68%. The Vix closed 12.2. The Stoxx 600 Index fell 0.6%. The MSCI All-Country World Index fell 0.5%.

Currencies: The Bloomberg Dollar Index rose 0.2%. The pound rose 0.3%.

Bonds: The ten-year closed around at 3.089%. The 2-year closed at 2.82% and the 30-year closed at 3.224%. The ten-year bund closed at 0.512% and the OAT closed at 0.834%. The U.S. curve closed on the day with the following closes 2/10 at 26.8 bp, 2/30 at 40.5 bp and the 10/30 closed at 13.5 bp. The U.S. 5-year closed at 2.969%.

Commodities: WTI gained 2.1%.  Gold fell 0.1%. The Bloomberg Commodity Index gained 0.5%. Copper slipped 1.1% on trade fears.

Bitcoin is trading around $6,623.

Aussie Market Today.

Equities slipped overnight and are most likely to do the same in Australia. With holidays up north, the equity market was relatively quiet and stable. This may well change once Asia returns and evaluates what the Chinese reaction to the Trump tariffs will be and how the Chinese equity market performs. I expect equities to be weaker on the day

Another choppy day for bonds. At higher levels, there appears to be interest. Also with the Composite Index showing a large shift in duration, many money accounts will be looking to lengthen their portfolios. This means buying over the week. The game will be who wins the blink contest. I expect money accounts to win the day and that means we could see a little rally in bonds.

The Aussie dollar will once again be beholden to views on commodities and the Chinese economy. With energy up and some base metals weak the signals are a little confused. The Aussie may well drift on the day and continue to do so until some form of consensus is reached