What’s Happening To The Trump Trade?
A little while ago Trump stepped up to take the accolades for the December quarter growth numbers and the improvement in the payrolls numbers when the stock market was running hot. But what have we learnt since February, not much it appears. What we have seen is a failure of the Administration to do anything meaningful and put policies before the public. The failed Health Care Bill was the catalyst for the market to step back and go ahhhh.
What needs to be addressed urgently is policy and it certainly appears as though Trump has done such a great job with the Democrats that they are unwilling to support Bills that the Republicans won’t support. There has been plenty of rhetoric and bluster but not much else.
But what has slipped unnoticed through this time is a disturbing lack of lending. Trump was supposed to get the Banks to lend. Economists are scratching their heads to try and unravel why loan growth is running at about 3.8% yoy when the comparable last year was 6.4% and that was despite poor corporate earnings and sluggish growth rates and in October 2016 the growth rate was 7.6%. The current shortfall equates to about $100 billion.
What is more intriguing is that the slow growth rate is at a time when Corporate CEO’s should be borrowing after all Trump did promise better economic times, lower taxes and less regulation. Corporate confidence is high so why the slowing growth rate? My own view is that the CEO’s are confident because of promised tax cuts makes their job more secure as they can report higher profits and may be able to repatriate money to invest in increased dividends and share buybacks which is what happened when Bush did the same thing, Not much went towards CAPEX and increasing productivity because that is difficult and many a good CEO has stumbled trying to raise earnings through increasing the spend on CAPEX to increase productivity. For the economy to grow PRODUCTIVITY Capex has to increase and that does not mean wage cuts which has been Ross’s first call.
Another interesting dilemma for Trump will be how he deals with a probable default by PdVSA the Venezuelan state owned oil company. PdVSA looks likely to default to Rosneft (Russian Government Oil Company). As collateral for the loan is a 49.9% equity stake in Citgo. Citgo is the largest foreign owner of U.S. domestic refinery capacity. It owns three refineries, network terminals and pipelines running across 24 states. A default would hand the Russians a significant stake in the U.S. energy market and that cuts directly across Trump’s agenda of energy security. Such an outcome would make any sanctions against Russia increasingly difficult. It will be interesting to see how Trump deals with this problem.
On the day the flight to safe havens continued as it appears investors are derisking for any number of events. French assets were sold generally across the board as investors there are becoming increasing concerned that the rise of both Le Pen and the Left will make the outcome increasing difficult for a major Party to win. The final round of voting will finish May 5. The spread between 10 year Oats and Bunds is now about 74 bp. Italian and Portuguese bonds softened on the day as well.
The day finished with 10 year Bunds / Oats closing with a spread of about 75. The Yen gained 1.2%. The Dollar Index fell 0.3%. The S&P closed slightly weaker, down 0.1% after sliding almost 0.8%. The big winner was U.S. Treasury’s. The U.S. 10 year fell to 2.29% that’s down about 10 bp from the beginning of the week and a significant move for bond buffs. Bonds are looking through the rhetoric and are preparing the markets for slower growth or maybe they are just the risk off trade whilst we wait for detail. On the day the curve flattened overall with the 2/10 closing at 105.80 in about 3, the 2/30 closed at 169 in 2 and the 10/30 steepened marginally at 63 out 1 bp.
Oil finished the day up 0.2% and gold rose 1.4%
Aussie Market Today.
As we approach Thursday I expect the market to become thinner and quieter unless some geopolitical event arises. Geopolitical risk is high however until something happens I don’t expect any major market moves. Bonds should be stronger on the day however depending upon how traders are positioned the market could soften into Thursday’s close.
Equities are likely to be slightly weaker on the day and that trend could well continue into Thursday. The AUD looks to be under pressure and could soften over the day.