As the North East awoke Friday, havens were on most traders’ minds. Markets were perplexed and fearful following Trump’s rhetoric as Trump and his belligerent North Korean counterpart went toe to toe with outlandish threats. Markets reacted accordingly. However in the U.S. it would appear some investors used the sell off as a trading opportunity which makes sense.
If you believe that nothing but idle threats will come from the current posturing by Trump and Kim Jong-un, then the selloff should be seen as an opportunity. And that is what both the bond market and equity markets did Friday.
Equities rallied and some of the rally was due to promises, once again, of tax cuts etc. Also equities had sold for the last 5 days and shorts needed covering and others rallied the market because the inflation numbers are pointing to a slow hike by the Fed rather than rapid hikes. This suggests that interest rates will remain steady, justifying current expectations and prices.
Bonds a safe haven
Bonds rallied for slightly different reasons. They are safe haven assets and generally bonds in G10 countries rallied. The bond rally could come apart later as we close on the September 29 and September 30 deadline for the Government’s debt ceiling. Economists have a 6% chance of the Government defaulting which is higher than you would or could expect given the GOP controls both houses. Once again it just shows how divisive the Trump Administration is as it is inept because funding Government should be relatively easy if you control both houses.
The Trump Administration appears to be too busy keeping the far-right wing happy and feeding them the required rhetoric when they really ought to be governing. The example being the weekend riots in Virginia when a right-wing extremist in an act of terrorism drove his car into a crowd and Trump failing to rebuke the far-right wingers and Neo-Nazis.
On Friday to recap:
The S&P500 had its worst period since March, and credit (junk) had its deepest slump in a year.
The S&P 500 rose 0.1%, the Stoxx 600 fell 1%, and the CBOE Vix lost 2.7%. To add fuel to the bearish fire, bear funds saw good flows over the last few days signalling the sell-off may have further to fall. The American Association of Individual Investors found 36.1% of investors surveyed expected the market to rise, this is 2% below the historical average, whilst 32.1% expected the market to fall.
The Bloomberg Dollar Spot Index fell 0.4%.
Bonds rallied with the U.S. 10-year rallying 2 bp to close 2.19%. The 2-year note rallied 3 bp to close at 1.29% whilst the 30-year pushed out a couple of bp to close 2.79%. The curve was slightly steeper. The 2/10 closed 88.90 bp, 2/30 closed at 148.8bp and the 10/30 closed at 59.5bp.
Commodities saw WTI rise 0.5% to close at $48.82 a barrel. Gold rose on heightened anxiety and closed 0.5% higher. Nickel fell 3% on raised tensions on the Korean Peninsula. Chinese steel slipped and zinc shed 1.4%. Copper slipped 0.2%.
Aussie Market Today
Expect equities to rally on the day as the U.S closed on a more positive note. Bonds to rally as geopolitical tensions remain elevated.