What Could Possibly Go Wrong?

Markets reacted predictably to a weak jobs number. Weak is good for equities, right? After all what could possibly go wrong. A weak number means that the Fed will ease later this month as predicted by Fed Funds Futures traders and that means the discount and risk -free rates are lower and that’s all good for the models. Buy, buy, buy. Equity investors are becoming more confident.

And that is possibly why it’s easy to feel a little disconnected. Bond rates are screaming something is happening, S&P are starting to become a little bolshy with emerging market countries regarding their debt, the U.S. is heading towards a budget deficit of $1 tr, what could possibly go wrong?
Joe Powell kicked off the markets festivities with commentary that cements the views that the Fed will ease on September 18. Antitrust concerns hurt some of the larger tech stocks. What is curious is that the dividend yield and the yield on a U.S. 30-year has inverted. This inversion makes purchasing equities sound.


What is curious about the current market is that whilst there is a disconnect between bonds and equities, some investors are buying stocks for their dividends and others are buying bonds for capital appreciation. The markets are getting stranger and stranger. With the inverted curve and with some investors concerned about a possible recession then bonds even at these levels look cheap because in a recession companies are likely to cut dividends to preserve cash and as a result, equities would most likely be sold.

The jobs report on Friday was mixed. Jobs growth slowed more than expected. This is the seventh consecutive month where retail hiring has declined. The report was a little bitter, sweet with strong wage gains offsetting the decline in jobs.

The equity market rallied Friday with 8 of the 11 major sectors experiencing gains. Healthcare was up 0.3% whilst tech was down 0.2%. The communications sector was under pressure as Facebook slipped 1.8%. Facebook is under investigation for antitrust behaviour.

And as for treasuries, they are in a treasury state of mind. Treasuries were mixed with the curve flattening between 2-30-years and 2-5-years inverted further on the day. Bond traders were somewhat coy and probably will look to reset positions later this month.

And something to watch for the Brexiters. The Federation of German Industries BDI is concerned that a no-deal Brexit will cause German growth to fall to zero. The BDI notes that global trade tensions remain high and that too will be a contributing factor towards zero growth. A technical recession is now a possibility as GDP fell 0.1% in the second quarter.

Market Recap.

Equities: The S&P 500 rose 0.09% The Dow rose 0.26%. The Vix closed at 15. The Stoxx rose 0.3%.

Currencies: The Bloomberg Dollar Spot Index fell 0.1%. The Euro fell 0.1% and the pound slumped 0.4%.

Bonds: (as at 4.30pm). The ten-year is trading at 1.56%. The 2-year is trading at 1.54% and the 30-year is at 2.025%. The U.S. curve closed on the day with the following closes 2/10 at 1.6 bp, 2/30 at 48 bp and the 10/30 closed at 46.2 bp. The U.S. 5-year closed at 1.431%. The 2/5 spread is now -11.1 bp. The ten-year bund closed at -0.637% and the British gilt closed at 0.507%. The 10-year yen gilt is trading -0.244%. The 10-year OAT (France) closed at -0.34 and the Italian 10-year bond (BTP) is now trading at 0.877% and the 30-year at 2.024%.

Commodities: Gold rose 0.2%, WTI fell 0.8%.

Bitcoin is trading around $10,396.

Aussie Market Today.

Stocks to rally on the day as the risk off-trend continues.

Bonds should be mixed on the day. Given Friday’ s movement we may see some consolidation around current levels and possibly even some improvements.

Credit should be stable on the day. Demand continues and as the equity market rally continues credit will improve.

Geopolitical risks remain high and still need to be monitored. Watch developments out of Hong Kong as the protests have a real chance of upsetting sentiment in the region. Watch for a tweet on trade or comment on trade out of China, either commentary will have the ability to move markets.