The Warning Lights Are Flashing!

The U.S markets waited patiently for the release of the Fed Minutes before doing much at all. Markets and especially the stock market was quiet in the period prior to release of the Minutes. At stake was what the Fed was thinking and how the Board of Governors viewed the economy and the world economy.

The bottom line was that most of the members thought that the economy was on track and that a hike could come in June. The members agreed on an unwind of the Fed’s portfolio which has grown to some $4tr. The equity market rallied. But wait! There was one large caveat tucked away, the caveat being “it would be prudent” to wait to see how the economy was performing as some recent data is suggesting the U.S economy may be starting to slow and a rate hike could jeopardise that growth.  The officials were concerned that falling inflation and an unwind of the balance sheet could hazard growth prospects. Prior to meeting the probability of a rate rise was about 80% and just a few moments ago the probability was about 75%.

Equities hit a new high and the main winners were real estate, materials and utilities. A strange combination given these sectors are seen more as income rather than growth prospects.

Bonds on the other hand rallied and the yield curve became a little kinky over the day. The spreads were 2/10 96.40 in 0.9bp, 10/30 67.2 out 1.2bp and the 2/30 in 0.2 bp. The U.S 10 year closed at 2.25% in 3 bp on a possible tightening whilst the 2 -year closed at 1.28 in 3 bp from the previous day’s auction result. Bonds are starting to talk and investors appear to be growing more sceptical.

The strong bond movement could be China purchasing more U.S treasuries after their down grade by Moody’s or could be growing disillusionment with Trump’s tactics and his team in their Budget Request. There appears to be a growing disenchantment within the Republicans of Trump’s agenda and the Budget Request highlights a gulf internally between a number of factions within the Republican Party. Trump’s tactics appear to be here is my Paper it’s a great Budget and if you don’t approve it you cannot blame me for growth slowing and not reaching 3%. It almost appears as if the request was doomed to fail and was purely a cynical political play.

The movement of bonds are telling the markets to be wary.

On the day, the S&P rose 0.2%, the Dow up 0.36% the Stoxx gained 0.1%. The Bloomberg Dollar Spot Index fell 0.3%, the lowest since November according to Bloomberg.

China’s downgrade to A1 from Aa3 hurt the commodities markets. Nickel fell 2.6%, copper fell 0.9% and iron ore at one point was down 7% on the Dalian Exchange before hitting the limit down stop before recovering to only be down 6.5%. Gold fell .3%. Interestingly gold is experiencing unpredictable fluctuations of size and much of the blame for the increased volatility is attributed to the exit of the banks.

The Aussie Market Today

Equities will try to rally but the brake may well be commodity prices and the impact on the Aussie Resource giants. I expect equities to hold a soft tone.

The Aussie dollar gained strength against the USD however it will only be a matter of time before the Aussie slips. The AUD strength could be attributed to buying of AAA bonds however given the spread between U.S 10 years and Aussie 10 years yesterday at one point was 20 bp and is currently at 25. The nexus at present appears to be broken.