Trump Trumps Trump
Trump had a big win over Vietnam today with the Vietnamese Prime Minister pledging to purchase more goods from the U.S. to reduce the trade imbalance between the two countries. I guess in a week where the rest of the world sees Trump’s efforts as mediocre at best this is a win. The other big piece of news for the U.S. is the persistent rumour that Trump will withdraw the USA from the climate Paris accord. That may just spark another round of anti-American sentiment and cause Europe to develop stronger links with China and the Chinese Silk Road Project. This would mean that Europe would develop a much larger market and a rapidly increasing wealthy market in Asia in stark contrast to a mature and low growth market as in the U.S. A withdrawal from the climate Paris accord could also impact heavily on U.S manufacturers selling goods into Europe as one could expect that those companies will have to meet certain standards to sell into Europe and without certifications they will have trouble selling those products. A withdrawal will not help U.S competitiveness abroad. Several U.S business leaders have suggested they will withdraw from Trump’s business advisory group, Elon Musk has certainly made his intentions clear to this point.
Trump’s love affair with May the UK Prime Minister may also hang by a thread. In the latest polling numbers, out of the UK the Conservatives appear to have lost the majority and could possibly even lose the election. Brexit has been responsible for a number of weird things and things just got weirder. If the Conservatives lose then Trump will have a united Europe and UK that could test U.S relations across business and policy. There will be no love lost between Trump and the Labour Government should it win. Currently the You Gov poll has May winning 310 seats and Corbyn 257 seats with May holding 42% and Corbyn 39% it’s the remaining 19% that matters and that is what is concerning the UK equities market and the currency traders.
Markets adjusted to the poor polling in the UK and once again Brexit or the vagaries of Brexit has woken investors to increasing risks. The Equity markets in Europe were a little weaker and bonds were stronger.
The key to the recent rises in the U.S. equity markets has been growth. The Fed’s Beige Book minutes were released and the minutes show concerns over a dampening business outlook. As labour markets tighten economic growth has been slowing and many firms have become less optimistic about the future. Inflation remains tame whilst groceries, trucks, cars, and groceries fell prices for lumber rose. There is also talk that the Fed may not tighten now in June citing low inflation, sluggish growth concerns over what could happen if the Government shuts down because it has breached its debt ceiling and policy uncertainty. The talk is that possibly the rate hike could then come September. There has been a broad discussion about accelerating the wind down of the Fed’s balance sheet. Such a trigger would be similar to a rate hike and allow the Fed some breathing space over policy uncertainty and debt ceiling triggers. Uncertainty is rising and volatility remains subdued, this is a strange brew.
On the day, U.S equities had a small down day. The mood changed when JP Morgan Chase and B of A both reported that their second quarter trading was weak with one suggestion that JPM had seen a 15% reduction in sales and trading. The announcements send the Financials into a slide and the change in sentiment took the equity indices lower. Banks were expected to do well in the Trump environment as cutting regulations were going to improve their competitiveness. To date there have been relatively few changes to the bank regulatory environment.
Commodities have continued their weak trend. Iron ore was down again in Dalian. WTI fell 2.7% and gold rallied 0.4%.
The U.S. equities market saw the S&P fall 0.05% Nasdaq 100 down 0.1% and the Dow down 0.1%.
U.S treasuries staged a small rally with the 10-year trading to 2.20% and the 2-year closing at 1.286%. Benchmark gilts in the UK rose 1 bp to close at 1.04%, the French 10-year OAT closed at 0.725% and the 10-year bund closed at 0.297%. The U.S curve flattened slightly. The closes were 2/10 91.70bp,2/30 at 157.70bp, and the 10/30 closed at 65.7bp.
The Bloomberg Spot Dollar Index fell 0.2% the pound rose 0.2% and the yen strengthened 0.1%.
The Aussie Market Today
The U.S. market has been struggling as expectations are diminishing. This changing environment could start to seep into the Aussie equities with time. I expect on the day for Aussie equities to be marginally weaker however as we close into the end of financial year be wary. At times, I expect to see profit taking and selling to lock in tax losses and gains.
Bonds should be slightly stronger on the day however with the Aussie 10 year spread to the U.S. 10 year so tight it’s hard to imagine this trend continuing ad finitum. Something has to eventually give, either it’s the currency or the interest rate.
In my graph I have measured the relationship between the interest differential between the US-10 year and Aussie 10-year against the Aussie dollar over a twenty year period. As you can see at some point when the spread gets tight or too wide the currency moves. The correlation runs about 67% and there are around 5057 data points so not enough to give any strong evidence but anecdotally it is sufficient.
With the Australian economic outlook slowing then it will likely be the currency. The key to our economy is China and if China slows many of our trading partners slow and that means less demand for our resources.