What We Learnt.

Now that we are in risk off mode again, just what did we learn? Well, we learnt that despite all the tariff noise, the U.S. economy is still performing better than most economies. There is also the belief that this time, the Fed will not stop a hiking cycle even if there are some calamitous events such as Turkey.

The Fed will hike regardless of what is happening elsewhere and this is very different to the Fed we know. For emerging markets borrowers, this is a problem and one that means the issues they face going forward will become tougher. The U.S. short end is saying as much with a high probability (92%) of a hike next month and a 50% chance by the end of the year.

For the moment, the bond markets are concentrating on tariffs and whether or not the U.S. can win a tariff war. According to the Maersk CEO, Soren Skou, they cannot. This comment is rather unusual in that Maersk rarely comments despite accounting for about 20% of global shipping and is in a good position to see how trade flows can change.

So Friday saw another Turkish bath, but markets did not care what was happening there. Markets were keen to see whether there was a thaw in U.S.-Sino trade relations. Turkey must be getting close to requiring a bailout by the IMF.

And whilst markets were buoyed by the Chinese delegations, perhaps a closer view of what Chinese traders thought should be respected. The Shanghai dumped 1.3% and the Shenzhen was spanked 1.6%. Chinese investors are not acting as though they are viewing the talks positively.

Turkey goes on holidays Monday afternoon and if markets can hold for a period then bonds will inexorably rise as traders focus firstly on very hawkish comments from Powell and hawkish comments in the Fed minutes. The key being any period of stability will see bond rate rise sharply in a risk on environment.

Bond movements are going to be harder to pick as some numbers are coming in unexpectedly weaker. The University of Michigan consumer sentiment index fell 2.6 points with the fall attributed entirely to the Current Conditions component, a fall of 6.6pts, and the largest month on month fall in 7-years and the lowest level since November 2016.

The equity market in the U.S. has a few concerns to worry about. The Chinese have been dumping tech stocks and that could impact sentiment on the FAANGS. And any change on technology stocks will have a huge impact on the equity market given the FAANGS are responsible for about 20% of the performance of the equity market to date. For example, the massive Chinese tech stock Tencent has fallen some 6% in the past two trading days and is down a third from its high in January.

A change in sentiment would have an adverse effect. And a very interesting set of behaviours is being exhibited by the BOJ.

The BOJ appears to be more willing to accept large declines in the stock prices without intervening, leading some to believe that the BOJ is tightening by stealth. After indicating that it would accept larger declines, it has been behaving in the stock market the same way it acted in the bond market before announcing changes. The BOJ only bought two ETF’s the past couple of days. And that’s only after the TOPIX fell 1.7% and 0.6%, respectively. The BOJ has already reduced its bond buying programme over the past two years.

Equity markets moved ahead on Friday in response to the news that China was sending a delegation for trade talks. How those talks go will probably decide the next market movement. A lot hinges on these talks.

Market Recap.

Equities: The S&P rose 0.3%, the Dow rose .33% and the Stoxx 600 rose 0.3% while the Vix closed 12.64.

Currencies: The Bloomberg Dollar Index fell 0.5%, the yen rose o.3% and the euro surged 0.5%.

Bonds: The ten-year closed around at 2.864%. The 2-year closed at 2.61% and the 30-year closed at 3.018%. The ten-year bund closed at 0.304% and the UK gilt closed at 1.234% and the OAT closed at 0.666%. The U.S. curve closed the day with the following closes 2/10 at 25.2 bp, 2/30 at 41.2 bp and the 10/30 closed at 15.8 bp. The U.S. 5-year closed at 2.743%.

The real story, however, was in the spread between 5-year and other longer maturities. For the spreads with the 5-year, the curve flattened and there appears to be a real move towards flattening the longer maturities.

Commodities: WTI rose rose 0.6% and Gold rose 0.8%. The Bloomberg Commodity Index rose 0.4% while zinc fell 0.1% and is down 6.2% for the week.

Bitcoin is trading around $6,509.

Aussie Market Today.

Equity markets rallied. However, they rallied upon an expectation that Sino, U.S. relations would improve. The two main Chinese equity indices suggest otherwise. Watch the Chinese markets. However, on the day you could see a small improvement.

Bonds should be steady on the day, perhaps with a slight improvement. The risk off trade is hovering nearby.

Geopolitical risks remain high.