- by Suki Mann
|10 Yr Bund
|iBoxx Corp IG
|iBoxx Corp HY
|10 Yr US T-Bond
|FTSE 100 7,676.28, 49.95||DAX 12,765.94, 104.40||S&P 500 2,815.62, 6.07|
New algorithm needed…
The US administration looks to add tariffs to another $100bn of Chinese imports and if the Chinese retaliate in kind, they will have imposed tariffs on all US imports! Ooops. And so Trump’s trade tariff war is playing out to a classic game theory dynamic and it appears the US will extract the maximum from China as she serves to rebalance their trading relationship. We would hope that there is an intelligent and rational decision maker behind the throne – and there is some method in the madness of Trump’s tweet that “trade wars…. are easy to win”.
By far and away the larger debtor in this confrontation, the US does have the upper hand, but it will not come without its own domestic economic casualties – in the short term at least. The Chinese have additional firepower because, at over $1.2trn, they have amassed the largest holdings of US Treasuries. We would think that attempting to trash the US Treasury market would be fruitless given the QE option would be open (and used) by the Fed; but the knock-on impact of any rise in yields would only damage Chinese (and all EM) dollar-funding borrowers.
Friday’s non-farms report delivered just 103k of new jobs added in March, but February’s total was revised higher to 326k, while the unemployment rate was unchanged at 4.1% (expectations were for a decline) and hourly earnings increased a touch to 2.7%. The report will not have changed any of the current thinking for Fed members, and the markets will continue to toy with whether there are two or three further rate hikes to come this year.
Nevertheless, the markets took another tumble choosing to focus on Trump’s comments about the unfairness of the World Trade Organisation, as well as the potential for those additional tariffs. The President is upping the ante, with the Mexican wall also firmly in his sights – just as the November mid-term elections might be. Few can argue that he isn’t delivering on his campaign promises, it’s just that few are used to such brazenly open hostile language, lacking the diplomacy (and inaction to be fair) that we might have been used to these past few decades.
There’s a crudeness about it, but things are going to change and we going to get some results. They might not be the ones the markets would like, but it’s happening. As we have suggested previously, ‘trading Trump’ is extremely difficult as shown by the high levels of volatility and daily/intraday swings in (US) stock markets. The situation is also going to persist for a while and 1% or moves up/down in equities are beginning to look all too frequent. Dare one persist in buying the dip?
Rates supported, equities falter
Friday played to the tune of the fixed income markets. There was a better bid for duration which firmed as the session progressed into those sharply lower US equities. The bigger declines came after the European close and we might expect a weak opening on Monday.
The S&P dropped almost 60 points to 2,604 and having clawed its way back to being flattish year to date on Thursday, we’re now back to being around 3% lower. The Dow is similarly off by the same amount, at 23,933. In Europe, the Dax fell by 0.5% in the session, having risen 3% on Thursday, but we can expect that to open lower on Monday as the week gets off to a very jittery start.
As for rates, they have been equally jumpy, but holding tighter ranges. The 10-year US Treasury yield closed at 2.775% (-6bp), we believe more focused on the trade feud than anything which might have emerged otherwise front he non-farm payroll report. In Europe, the 10-year Bund yield dropped 3bp to 0.49%, having toyed with 0.52%, while the equivalent maturity Gilt was yielding 1.40% (-2bp). We have failed to break lower in yields during the past few weeks, and we think that might be the case now too – unless we get some additional major development (read “tweet”).
Credit remarkably unchanged
Credit markets took a back seat, actually doing very little in the session on Friday. The only deal came from Santander UK in covered bond format. The week’s overall primary activity was sprightly though, with €4.6bn of issuance from IG non-financial corporate borrowers and there was the odd real estate issuance. The high yield market is yet to open its account for the month, though, while senior issuance came from Mizuho (€1bn, two tranches) and UBI Banca.
In the secondary cash market, we closed unchanged on Friday. And we closed unchanged in the week, too, as measured by the Markit iBoxx IG cash index. This in itself is a remarkable feat given the volatility and weakness in stocks. The index was at B+107.3bp, which is around 10bp wider YTD and total returns are just -0.35% in the year to date.
At B+333bp, the high yield cash index edged 3bp lower last week but is 47bp wider this year so far. From a total return perspective though it looks a little better, showing losses of just 0.38%.
Protection costs rose very moderately, although we might see a bigger rise come through at the open on Monday after the extended losses as we closed in the US. In all, iTraxx Main was up just 0.3bp to 58.0bp and X-Over rose 2.3bp to 286.1bp.
For this week, the earnings season for Q1 kicks off at the end of it with the banks like Citi, JP Morgan and Wells Fargo all due. On Wednesday, we have inflation data from the US with the core CPI rate expected to hit 2.0%, overall rate 2.3%.
Have a good day.
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