IRMA TRUMPS LIL’ KIMMIE Weather he likes it or not

Irma_Geostationary_VIS-IR_2017

What a day for poor old Kim. He had the world aghast at his next trick and along comes Hurricane Irma to trump whatever offering he had for the U.S. If paranoia were to set in I think this time it’s the U.S. that is paranoid, and for good reason. Trump has worked hard to drive a wedge through his Korean ally and it appears to be working. Both the North Korean Administration, the Chinese and probably the Russians are beaming joyfully about Trump’s misadventures and ill-timed and poorly executed lack of diplomacy. If South Korea is to be drawn to the Chinese for protection then this is now a real chance following Trump’s bellicose attacks on the leadership of South Korea. So, markets sit in fear and watch in trepidation. When this real fear manifests itself only time will tell.

Markets are currently well. The equity market is more concerned about Irma. The Dow fell 1.3% at one point before recovering to close down 1.06%. The concerns were the impact of Irma on the Florida coast. You see, Irma is now a category 5 Hurricane which makes it far worse than the recent category 4 Harvey. The weather events are unusual in that both are anomalies and both are within a week or so of each other. The weather tested equities. The big losers were the insurance, reinsurance companies and cruise operators. XL Insurance fell some 6% on weather concerns and Carnival and Royal Caribbean also saw falls in their share price.

Meanwhile back at the Fed, we had a bit of a gabfest on the day. This gabfest was the driver I believe for the rather pessimistic bond market to take matters into their own hands and rally. The bond market was comforted by the exchanges of Neel Kashkari, the President of the Minneapolis Fed and Lael Brainard a member of the U.S. fed Board of Governors. What these two had to say was music to a long bond trader’s ears. Kashkari suggested that the hikes by the Fed had hurt the economy and that the hikes had hurt employment opportunities. Brainard was concerned about low inflation and the impact on an already sluggish economy. Forget about Kim, these were dovish words with a capital “D”.

The upshot was that bonds staged a significant rally. This underscores how markets are viewing the inept administration that seemingly lurches from one missive to the next. Bonds don’t believe that this Administration is good for much other than cheap talk, and the rally suggests this to be the case. When Trump arrived, bonds weakened to 2.6% and everyone was super bearish. Bonds are now about 2.06% and many believe that bonds can fall further. Bonds believe that the growth story is overstated and the big concern is the lack of inflation as inflation continues to bump along around 1.4%.

Poor old Kim, no one cares. Well gold cares and gold rallied 0.4% The South Koreans care as they noticed the ICBM being moved.  However, the world awaits to see what the next instalment of Kim and Donald delivers.

Recap:

Equities slumped today. The Dow fell at one point 1.3% before recovering to close 1.06% down. The S&P 500 lost 0.76%.

Currencies saw the Bloomberg Dollar Spot Index decline 0.3%, the euro strengthened 0.2%, and the yen surged 0.8%.

Bonds were the pick of the day. The U.S. 10-year closed at 2.06% rallying 9 bp, the 30-year closed at 2.68% in about 8bp and the 2-year note closed at 1.29% in about 4 bp. The curve flattened between 2/30 at 138.7 in 4.4bp, the curve between 2/10 was in 5.5bp to close at 76.6bp and the 10/30 widened slightly to close at 62 out 2 bp. The European 10-year benchmarks rallied some 3 bp. The gilts closed at 1.01%, OATs a t0 .638% and the bund at 0.334%.

A big change of sentiment has occurred with the probability of a Fed hike with no hike expected between now and December 2018. The probability of a hike in December 2017 is now at 25.8% and a hike in June 2018 is now at 42.3%. As we know, sentiment can rapidly change. However, for the moment sentiment suggests that the U.S. economy is about to stall and the Bond Market is clearly shouting that message.

Commodities saw gold rise 0.4% on geopolitical tensions. WTI rose 2.7%and copper continues its surge up another 0.3%.

Aussie Market Today.

Geopolitical risk will drive sentiment today. Equities will be the victim of heightened risks. Bonds are likely to stage a neat rally. Bonds should follow the rally in both Europe and the U.S. and with increasing tensions, bonds will act as a safe haven in a troubled sea of risk. Today will most likely be an emphatic risk off day.

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