Shape shifters.

What a glorious weekend. Trump and Xi came to something but not really an arrangement because nothing really was agreed. And the stock markets yelled hurrah and rallied. But what is really interesting is that a section of the yield (U.S.)  has inverted for the first time in a decade.

The spread between the 3-year and 5-year fell to negative 0.6bp. This could be a sign that the bond market is telling the Fed that its tightening cycle may be towards its end. There are many reasons why the curve has inverted but the important part is the performance of the 5-year as investors anticipate the end of hiking beyond 2019.

The front end of the curve is repricing, as well as the spread between 2018 and 2019 Eurodollars, reaching 27bp overnight.  This indicates a contrarian view that points to a couple of hikes in 2019. The market is confused as we are seeing both relief and risk on trades.

Yield curve aficionados should watch the 2 year-10-year spread. It has now fallen to around 16 bp and the next level of 10 is the level to then watch. The year 2019 is shaping to be a very different year to 2018, with trade and rate hikes very much in focus. The yield curve flattened in parts up to 5bp  with 2-year versus 30-year seeing a big movement.

For economic analysts, consensus is divided. The trade deal (of sorts) has led to more optimism for purchasing managers yet others point to falling construction spending. The jobs report on Friday will be the key leading into the December 18-19 Fed policy meeting.  Some of the FOMC members such as Quarles believe that the economy is in the Goldilocks zone – neither too hot or too cold. Neutrality appears to be the thinking.

The shape of bond markets elsewhere has been changing. Brexit has seen investors switch to risk-free assets and in the UK the 10-year gilt has fallen to 1.307%. This even after the BOE warned investors that intervention may not be in the form of easing but could even be a tightening of 5.5% as a worse case example if inflation spiked.

But the stories of the day revolve around oil and stocks. Oil rallied after the Saudis and the Russians agreed to slow production. And in another twist, it appears Qatar a long time solid member of OPEC is likely to leave OPEC in January.

Oil has rallied some 4%. Equities rallied on trade. However, the rally is somewhat muted and cautious. The trade deal can be called off at any time and this view cooled the current optimistic view. Commodities were stronger on the day with gold and copper rallying along with a number of other commodities.

For the stock market, the big movers were tech up 2.1%, industrials up 1.2% with the two bellwether shares Boeing up 3.8% and Caterpillar up 2.4%. Energy rose 2.3%.

Market Recap.

Equities: The S&P 500 rose 1.09% and the Dow rose 1.135%. The Vix closed at 16.3 while the Stoxx rose 1%.

Currencies: The Bloomberg Dollar Index fell 0.2%, and the yen rose 0.1% and the euro gained 0.2%.

Bonds: The ten-year closed around at 2.972%. The 2-year closed at 2.823% and the 30-year closed at 3.254%. The ten-year bund closed at 0.307% and the OAT closed at 0.694%. The U.S. curve closed on the day with the following closes 2/10 at 14.7bp, 2/30 at 43bp and the 10/30 closed at 28bp. The U.S. 5-year closed at 2.823%.

Commodities: WTI rose 4.4% to $53.19 a barrel. Gold rose 0.7% and copper (LME) rose 1.6%, the highest level in 10 weeks and the biggest increase in a month.

Bitcoin is trading around $3841.65.

Aussie Market Today.

Today could be an interesting day with pent-up bulls looking to launch a buying spree. Bonds could be bearish. However, the general offshore view is that bonds are also rallying, breaking the negative correlation once again with stocks. Today looks likely to be risk on and therefore equities rally.

Bonds are likely to rally as a dovish Fed and a rallying treasury market set up Aussie bonds to trade on fundamentals.

The Aussie dollar was stronger on a weaker dollar. This trend may continue for a little while.