The markets continue to be leery of events. That wariness has translated to a subdued equity market and a bond market that cannot decide whether it wants to rally hard or sell off a little bit. Movements are small and volatility is mild. Markets want direction from either Government or the Fed and neither are forthcoming.
The equity market softened a little over the day. Some suggested that the softening is due to weak corporate data, others suggesting weak economic data and others remain mildly concerned about the debt ceiling. If Mitch McConnell and Mnuchin can live up to their boast that the debt ceiling can be raised with no strings they would have done a fantastic job. But given the way that Bannon was suddenly dismissed and Mnuchin not being too familiar with the Conservative element within the GOP this is a real ask, given the hard right’s conservative view of debt and how debt should be used.
Congress and the Senate are meeting in September. Thus, both men have to work hard to raise the debt ceiling within the month. Past performance in tax reform, the repeal of Obamacare and the infrastructure policy would suggest this could be beyond both men’s capabilities. As for economic conditions, the softening of the U.S. economy is real. A good indicator of economic conditions is that the Transport Sector is down 6.7%.
The central bankers’ gabfest starts later this week. Investors will be watching closely statements from both Draghi and Yellen as to the possible direction of policy. They will also be looking at indications as to when and how QE will be slowed or reversed. For bonds, this will be an important speech as it will provide a timeline for how reducing TARP will occur and which assets are vulnerable. For European traders, this is even more paramount as the EU has bought corporate bonds down to sub-investment grade. A reduction could see corporate bond spreads start to adjust and investors being rewarded again for risk.
Political turmoil is expected to continue as Trump looks to provide policy on Afghanistan and handling the North Koreans. Military exercises are about to commence this week so it is probably safe to expect some sabre rattling. Meanwhile, a number of Asian countries are starting to question the U.S. military capabilities given two recent incidents. U.S. warships failed to see the approach of an 50,000 tonne oil tanker and a large container vessel.
U.S. stocks were mixed with heightened tensions between the U.S. and North Korea. The Dow rose 0.13%, the S&P was up 0.2% and the Nasdaq fell 0.05%. The Stoxx 600 fell 0.4%.
Geopolitical risk helped boost the yen versus the dollar with the yen being used as the safe haven currency. The pound gained 0.2% and the Bloomberg Dollar Spot Index fell 0.3%.
Treasury yield were marginally stronger ahead of the Fed’s Jackson Hole convention. What is said will be important for the direction of both equity and debt markets. Currently, bonds are rallying because of perceived soft economic data. There is also a belief that the Trump administration cannot get anything done. Equity markets remain hopeful that rates will remain low and that the administration will get something done. The 10-year treasury closed down 1bp to finish at 2.19%, the 30-year closed 2.765% and the 2-year closed at 1.305%.The yield curve remained relatively stable. European bonds rallied about 2 bp with the 10-year benchmarks closing 1.066% for gilts, bunds closed 0.396% and the OAT closed 0.694%.
Gold rallied 0.4%, and WTI fell 1.3%. Zinc hit a fresh decade high of $3,185.50. The high is as a result of a cutback in supply. The closure of the exhausted Century mine in Australia and Glencore’s 500,000 tonnes of annualised cutbacks may be the main reasons for the bullish outlook. The U.S. is looking to ask the WTO to investigate China’s tariff-rate quotas for agricultural products. NAFTA talks are likely to dominate price movements at some stage. Commentary should be watched especially as it appears as both Canada and Mexico are becoming somewhat frosty to an antagonistic U.S.
Aussie Market Today
It would appear as though all is good in the world again. The main risks this week will stem from either heightened tensions on the Korean Peninsula, or a comment from Jackson Hole. Be wary. In the meantime, equity can rally and bonds will be steady.