What A Difference.

What a difference a day makes. Yesterday stocks were sold on earnings fears and trade. Today stocks rallied because investors think the Fed will ease rates at the end of the month and may be inclined to ease further. And why they would think that was because several Fed members have said so. John Williams the New York Fed President suggested that swift action should be taken if the economy is in trouble. Whilst Vice Chair Richard Clarida echoed Williams comments that policy makers should not wait until the economy falters. Either way the dollar stumbled on the comments and the equity markets rallied.

Consumer and financial stocks led the way higher. The FAANGs slipped after it was announced that Netflix had missed targets for overseas customers and fell 10%. Microsoft rallied on good sales. Union Pacific (Rail) jumped 5.9% after its profit as ahead of forecasts. Its main rival CSX fell yesterday on a weak outlook. Shipping and freight feel a little confused. The real story though for equities is once again the gloomy outlook is errant. Profits for S&P 500 companies are now expected to rise 0.6% in the second quarter. Expectations were for a dip so the equity market could still stage a steady run up. Volume on the exchanges was good with 6.68 bio shares exchanging hands.

Once again, the Fed Fund futures are toying with the idea of a 50bp rate cut this month.  Fed funds have priced in a cut of 42bp, so the bet is that at least a 25 bp and some.  A cut could be seen to be a cushion against a slowing economy due to trade tariff effects.  And trade tariff effects may be around for some time as once again Trump has commented about trade with China. To be frank the commentary regarding China stirs and heartens Trump’s supporter base and with an election coming it’s a good strategy for keeping the base energised.
Following, comments from Clarida and Williams the treasury market rallied. The 10-years rallied about 3 bp. For interest rate markets and bond markets, the Fed meeting at the end of the month will be important. The size of cut will matter for the next market movement.

The ECB also looks to be on track for a cut in September. QE 2.0 may be needed to stimulate an ailing European economy beset with Brexit and trade tariffs and slowing economic conditions. Inflation remains below the target level and the ECB is expected to cut its deposit rate by 10 bp in September. The inflation rate has fallen post when the ECB was buying assets. Inflation is expected to average 1.3% versus the ECB target of 2%.

In other news Iran has suggested that if sanctions were eased it would make a substantial offer on its nuclear programme. No doubt emulating North Korea. Meanwhile the U.S. Navy has shot down an Iranian drone after the drone closed to within 900 metres to the vessel.

The Rant.

If you believe trading is easy just look to the problems the top trading firms face. JP Morgan, Goldman Sachs, Citibank and Morgan Stanley have all seen and faced their worst first half trading revenue slide in over a decade.

Uncertainty over trade, rate cuts and a number of macroeconomic events have made investors cautious. The question persists is the environment the new normal or is it an aberration that will correct in time. Portfolios have remained largely unchanged and leverage has failed to increase and this all points to uncertainty.
Trading revenues for the big 5 have slipped 8% in the second quarter and that follows a revenue rout of 14% in the first quarter. Revues for the big 12 global investment banks is expected to post around $60.8 bio versus a first half 2012 revenue of $77.5bio (data Coalition Development).

Factors that have caused the slump include the declining fortunes of hedge funds, regulatory rules that limit principal trading and alogo trading which has caused a sharp decline in trading spreads.

Market Recap.

Equities: The S&P 500 rose 0.36% The Dow rose 0.01%. The Vix closed at 13.53. The Stoxx Europe 600 Index fell 0.2%.

Currencies: The euro gained 0.5% The Bloomberg Dollar Spot Index fell 0.5%. the pound rose 1%.

Bonds: (as at 4.30pm). The ten-year is trading at 2.026%. The 2-year is trading at 1.756% and the 30-year is at 2.564%. The U.S. curve closed on the day with the following closes 2/10 at 26.4 bp, 2/30 at 80.4 bp and the 10/30 closed at 53.8 bp. The U.S. 5-year closed at 1.766%. The 2/5 spread is now 0.6 bp. The ten-year bund closed at -0.354% and the British gilt closed at 0.756%. The 10-year yen gilt is trading -0.133%.
Commodities: WTI fell 2.6%.

Bitcoin is trading around $10,554.

Aussie Market Today.

Stocks should be steady on the day with perhaps a hint of a rally. The trend will be confirmed by trading in Asia.

Bonds look likely to rally on the day as the trend out of both Europe and the U.S. is for a rally. Comments by Fed officials is also helping the belief that the Fed will ease. On that basis the Aussie bonds look cheap on a comparative basis and are likely to rally.

The bid tone in credit remains. Credit was slightly wider, but I expect that remains for the synthetics whilst the bonds will see demand. Demand continues for corporate bonds and especially so in non-bank credits.

Geopolitical risks remain high and still need to be monitored.