BLAH TO LIL’ KIM Markets brush off latest threat

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It’s hard trying to decide who is more impotent, Lil’ Kim or Trump.  After Kim rattled his blunt sabre and lobbed a ballistic over Japan’s head, the initial response of the market was to take risk off. Capital flew out of equities and landed squarely in bonds, gold and utilities. The flight was somewhat short lived. After what started out as a heavy down day, the equity market drifted into positive territory. Bonds rallied and maintained their levels. Overall, the rebound was positive.

EQUITIES FALLL .. N KOREA MISSILE NEWS

On the day, however we had the Trump troupe jetting down to Corpus Christie to get a briefing on Hurricane Harvey. Trump maintained all his bluster and the art of marketing, trumpeting his approach as being the gold standard in disaster relief. I am not sure what relief he has provided but at best it is only words at this stage. This is because before any government assistance can flow, an appropriation bill is necessary and Texas has to lodge its claim. The problem is that the Texan GOP legislators withheld support from the victims of Hurricane Sandy in New Jersey and New York State. No doubt there will be some robust discussions around flood relief in Texas.

The insurance fallout from Harvey will be interesting. On Friday, a Bill passes whereby if you litigate an insurance company for underpaying a claim then you could bear the cost of the litigation lawyer if you lose or if the paid amount is significantly less than the claim. This means that for those who are dissatisfied, finding a litigation lawyer will be difficult. As it stands the language around the policies has become more contorted. Hence, the insurance companies may find paying out flood claims far less onerous than expected. Commercial policies will become even more onerous for the victims.  This is because many claims are capped around $500, 000 and do not take into account lost earnings, and various other business issues.

Harvey is proving to be a nasty storm. It is heading back out to sea,  regaining strength and looks now likely to hit the oil hub on the Louisiana/Texas border. And in a somewhat chilling statement today, some people in the Houston area were told that if they had not been flooded so far that does not mean they won’t have flooding, because a lot more rain is expected to fall between now and the weekend.

What will be important to gauge now is how much the GDP and consumer confidence has been sapped by the storm. And later this week, we will be provided a guide to the Feds target level for inflation and payrolls.

There was an interesting point raised on NAFTA. Who actually decides whether the Agreement can be broken, and this perhaps is why Mexico and Canada are being difficult in Trump’s mind. It appears as though Congress may play a part in the whole saga. This means dropping NAFTA would imperil those GOP legislators in swing states and GOP heartland. As such, Trump may have difficulty in explaining why NAFTA should be stopped. In fact, it appears as though this may be the case in any major trade agreement. The decisions may well be both the President and Congress agreeing. Meanwhile, we await with bated breath for Mnuchin’s tax policy and how the agreement to raise the debt ceiling will be accomplished.

Recap:

After a bad start the U.S. equity market had a solid rebound. The Dow was up 0.3% and the S&P rose 0.1%.

The Bloomberg Dollar Spot Index rose 0.2% whilst the Swiss franc and euro remained steady.

Bonds rallied with yields falling on the U.S. 10-year treasury to 2.13% after falling to as low as 2.08%. The 10-year Bund fell to 0.34% and the 10-year gilt fell to 1%. The U.S. curve flattened in the 2/10 by 2 bp falling to 80.8bp, the 10/30 was in a point at 141.70 bp and the 2/30 was steady at 141.7bp. The probability of a rate hike in December is currently around 24.8% and in June 2018 the odds are 46.7%. But this view can rapidly change.  However, we will need to see some strong data and a boost in inflation if the market is to stop discounting the Fed’s ability to hike rates.

Commodities were once again mixed. Gasoline surged 5.4% on reduced production from refiners in Texas. Some 16% of overall U.S. capacity has been lost due to the storm. WTI fell 0.5%. Gold rose 0.1%. Copper hit a three year high as inventories slipped. Copper was up 1.9%.  Nickel rose 2% and is up 18% this year. Aluminium gained 1.2%

Aussie Market Today

Equities should rally on the day as traders move towards risk off trades. Bonds will settle and may gain a little on the day given the directions from offshore.

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