Unhinged.

Trump is a man in a hurry and with a need to demonstrate to his followers that he is doing something. With midterms rapidly approaching, he wants to demonstrate that he is a man of his word, and this being the case, is about to unhinge world trade. And let’s not forget the U.S. did extremely well out of world trade.

The risks are that he believes that a trade war is easy to win, forgetting now that supply chains are so extended and that various parts of manufacturing are no longer existent in the U.S. and this leaves the U.S. vulnerable. A lot of manufacturing expertise has now been lost and so too the people who make the machines work.

Trump has now suggested that the $200 bio tariffs that he threatened on China could start as early as next week. Expect retaliation from China. And it’s not just China. With his sights set on Europe, Europe is also likely to retaliate vigorously.

In the same gasp, he has suggested that the WTO is broken and the U.S. no longer wants to be bound by the agreements.

Trump is seriously contemplating withdrawing. Should he do so, a large number of countries would then be bound to retaliate and that could mean significant tax imposts on many U.S. multinationals. In the world of today, no one country can go it alone and Trump appears to believe that he can and he is taking the U.S. with him on that discovery tour.

The equities market was a little perplexed. However, the real damage will come when the tariffs are implemented. For the moment, the equity market is watching. And there is a lot to watch. The Argentinian peso was a disaster. The peso fell some 12% (and now down 15.8%) after the central bank raised rates to 60% to shore up reserves to fight the flight of capital.

For emerging markets, the stronger dollar and the borrowings the countries gorged on are now starting to bite. Emerging market currencies are deflating and so too their equity markets in general. Bonds are significantly wider.

One wonders just how much worse the news can go, and given the movements, the markets have held together. Sure the Vix was elevated but that’s only 13.5 and that’s not a disaster by any means. The euro came under pressure after the EU’s top negotiator suggested that Europe should prepare for a disorderly Brexit. The loonie was hammered after the GDP results were disappointing (Trump’s trade tariffs), European bonds rose in yield and Italian and Greek bonds blew out.

The U.S. equity market held up for one simple fact. Trade tariffs won’t show up in the second half of the year results but expect some movement in 2019. The equity market on the day did have to react to a large stock sell order in the last hour of trading. Apparently, a programme sell order was initiated with an order to sell 1,000 contracts towards the close. The bizarre thing is that the Ted spread looks tight and the repo rates are not moving lower, meaning that much of the short activity is actually duration hedging by large investors and traders. It would appear as though the bond market is waiting.

The consequence of a disorderly Brexit for the UK could result in a steep yield curve. Investors appear to be exiting because of the turmoil and in recently released figures by the BoE, investors have sold some 17.15 bio pounds of UK government debt in July. The problem for the UK is that it requires large inflows of foreign capital to fund its current account deficit. Something that the U.S. should take note.

Market Recap.

Equities: The S&P fell 0.45%. The Dow fell 0.53% The Stoxx 600 fell 0.6%. The Vix closed 13.53.

Currencies: The Bloomberg Dollar Index rose 0.2%, the yen fell 0.5% and the euro fell 0.3%. The yen rose 0.6% and the loonie lost 0.5%

Bonds: The ten-year closed around at 2.86%. The 2-year closed at 2.65% and the 30-year closed at 3.00%. The ten-year bund closed at 0.346% and the OAT closed at 0.694%. The U.S. curve closed on the day with the following closes 2/10 at 20.2 bp, 2/30 at 35 bp and the 10/30 closed at 14.6bp. The U.S. 5-year closed at 2.75%.

Commodities: WTI rose 0.9. Gold fell 0.5%.

Bitcoin is trading around $6,944.

Aussie Market Today.

The lead for the equity market will come from Asia. However, given offshore movements, expect the equity market to be weaker as tariffs once again become a concern.

Just when you thought it was safe and easy to short bonds, today will be even easier. Market uncertainty surrounding tariffs should see the bond market rally into the weekend. Depending on the news cycle some investors may choose to square up in the afternoon. However, I suspect most will want to be long to very long going into the weekend.