Flatter the curve.

The U.S. stock market thought that it had found its white knight. Asian equities were higher, Europe  -like the U.S. – started stronger.  And all to no avail. The gains vanished in a puff of oil smoke. Because it was energy that smoked the stock market today. More than 3 stocks fell for every two that rose on the S&P 500. Energy fell more than 1% as crude traded lower. The FANGS lifted tech stocks but that was not enough to halt the slide on the S&P.  Earnings results are weighing on stocks and some good news will be needed to allay any fears and get stocks higher.

For stock traders, their great fear is the dead cat bounce, and there does appear to be a little evidence to support this proposition. The Chinese markets rebounded,  up 7% in the past two sessions, after being down 30%. Phillips fell by 10% after it was announced that to avoid trade tariffs being imposed they had to revamp their supply chain.  And of course, there are the mid-terms and Trump’s reactions to the results.

With Amazon, Alphabet, Microsoft and Intel due to report, their results could buoy the stock markets. However, it remains to be seen whether they can or not. The market needs a stimulus. Corporate earnings though may be pointing weaker as several potential headwinds are emerging for 2019 results.

A heartbeat away, the bond market is revving its engines. The yield curve is the flattest its been for about 2 weeks.  And the Treasury Department is scheduled to issue $108 bio in new short and intermediate debt. The debt sales include $38 bio in 2-years Tuesday, $39 bio in 5-years Wednesday and $31 bio 7-years on Thursday. The 2-year is now at the highest level for in over 10 years.

With levels breaching several key levels, it is anticipated that the higher levels will attract interest. The auctions to date have seen solid domestic interest as overseas purchasers are losing interest. The benchmark 10-year rose as risk sentiment improved but then sold off as news of Trump’s tax cuts for the middle class gained momentum. All the good news in Europe and the improving Stoxx then came to a sudden end as concerns over Britain’s Brexit exit emerged.  The prickly Irish border and a possible challenge to May’s leadership dampened the bullish tone.

Netflix Inc is looking to tap debt markets for the second time this year and issue a further $2 bio. Netflix is planning on spending $8 bio on content in an effort to ward off competition and develop new markets such as India.

In a Reuter’s poll of some 500 economists, a downgrade in 18 of the 44 economies was predicted for 2019, whilst 23 economies were unchanged. The current themes are Trump, U.S. interest rates, and China’s economy as a result of trade tariffs.

For bond markets, the real test will be not so much in the form of inflation although that may well come sooner than later, but how the U.S. would fund Government should Trump provide a 10% tax cut for the middle class. The deficit is already ballooning and the 3% needed to balance the books is looking increasingly difficult to achieve in the following years especially with a possible slowdown due to tariffs. The curve may steepen as the U.S. market looks to adjust to increased issuance.  Although given the number of short bonds issued lately, the curve may flatten first. Bond yields could rise sharply and that could be enough to choke growth.

And if this is not enough to ponder then ponder this. Trump caught the GOP off-guard when he suggested a major tax cut for the middle class prior to the midterms. The only problem is,  he is the only one who apparently knows about the cut. And in an even stranger twist, apparently, he suggested to journalist Carl Bernstein that he is prepared to call the mid-terms illegitimate if the Democrats take control of the Senate or Congress. Such a call would be unheard of, but with his fake news buddies and conspiracy theorists like Bannon, the U.S. looks like lurching to new depths.

Market Recap.

Equities: The S&P was down 0.4%. The Dow fell 0.54%. The Stoxx fell 0.4%.  The Vix closed at 19.33. Shanghai SE Composite was up 4%.

Currencies: The Bloomberg Dollar Index rose 0.3% . The yen fell 0.3% and the euro weakened 0.4%.

Bonds: The ten-year closed around at 3.198%. The 2-year closed at 2.912% and the 30-year closed at 3.388%. The ten-year bund closed at 0.449% and the OAT closed at 0.82%. The U.S. curve closed on the day with the following closes 2/10 at 28.4 bp, 2/30 at 47.4 bp and the 10/30 closed at 18.3 bp. The U.S. 5-year closed at 3.052%.

Commodities: WTI was unchanged. Gold fell 0.4%.

Bitcoin is trading at around $6,395.

Aussie Market Today.

Asian markets were unable to lift the equities market in the other time zones. It will be interesting to see what happens now. Equities should be weaker on the day.  However, they may rally if we see further policy statements from the Chinese on restoring confidence in their financial system and economy.

Bonds should be weaker on the day as the trend suggests further weakness.