The Daily Update - Irrational exuberance

The Daily Update - Irrational exuberance

The US Treasury market rallied across the curve yesterday as geopolitical tensions intensified with the attack on the two oil tankers in the Gulf of Oman.

The short-end of the market is now pricing in three 25bp cuts to the funds rate this year and then nothing more, which is a little strange. Some argue for an ‘insurance cut’ as early as next week’s FOMC meeting sighting the Middle East situation…

The Daily Update - Legarde and Draghi Warnings / Made in Vietnam ... Sort Of !

The Daily Update - Legarde and Draghi Warnings / Made in Vietnam ... Sort Of !

Yesterday Mario Draghi and Christine Lagarde both gave stark warnings about the global outlook and the increasing headwinds that the world economy could face. At a conference, Lagarde told the audience ‘Global growth has been subdued for more than six years and the largest economies in the world are putting up, or threatening to put up, new trade barriers. And this might be the beginning of something else, which might affect us all in a more broad way’ adding ‘These troubling developments will create headwinds for all, but certainly for the CESEE (central, eastern and south-eastern European) growth model, a model that has relied on openness and integration’.

The Daily Update - Watching Closely as Stimulus Fades and Tariffs Fetter

The Daily Update - Watching Closely as Stimulus Fades and Tariffs Fetter

Global growth continues to stall, the US yield curve has been inverted for three months, BBB credits now make up over half the investment-grade universe (and equate to 4x the amount outstanding in 2008), numerous PMIs and employment figures have been recent disappointments, trade disputes are unveiling their long-term incompatibilities, and each new day marks the longest economic expansion on US records. These are all good reasons for market caution and yet the S&P 500 remains just 2% from its all-time highs. So is this apparent contradiction fueled by conviction or necessity?

The Daily Update - Unemployment; Lies Damned Lies and Statistics

The Daily Update - Unemployment; Lies Damned Lies and Statistics

This month marks ten years of the current US economic expansion, if we extend this cycle into July then this will be the longest expansionary period since 1854 (according to that one armed economist) surpassing the 1991-2001 growth cycle.

That achievement is impressive; however, it is difficult to find any great highlights to the current expansion except maybe the current low unemployment level with the rate at 3.6% in May, the lowest in 50 years. So why has wage inflation not raised its head in any meaningful way as would normally be expected by all our one armed friends?

The Daily Update - All Hail the 'Nearly New' Trade Deal!!

The Daily Update - All Hail the 'Nearly New' Trade Deal!!

Donald Trump has hailed the new deal with Mexico that will stem the movement of migrants to the US after he threatened to impose trade tariffs. However, on closer inspection, the deal may not be all that ‘new’ as a large percentage seems to be actions that Mexico had already promised to over the last few months. The deal states that Mexico has agreed to the ‘deployment of its National Guard throughout Mexico, giving priority to its southern border’ but the Mexican government had already pledged to do this back in March.

The Daily Update - World Oceans Day

The Daily Update - World Oceans Day

Later today we have US payrolls which will be closely watched by all, particularly as Wednesday’s ADP National Employment Report came in at just 27,000 jobs, well under the 123 - 230k range that was anticipated. We will focus more on this on Monday once we have had time to sift through all the numbers.

In the meantime, we thought we would focus on another key date in the diary, World Oceans Day. On the 8th June every year, thousands of people mark the day by focussing on the importance of the oceans to our health and the health of the planet and what each of us can do to protect it.

The Daily Update - Oil Bear Market / Trump Takes Aim at Mexico

The Daily Update - Oil Bear Market / Trump Takes Aim at Mexico

Oil was again under pressure as surging stockpiles added to fears that record US production and growing threats to global demand will all continue to push prices lower in the foreseeable future. In the last six weeks crude has fallen more than 20%, so now a bear market, with another leg down in the last 24 hours after the US Energy Department reported the biggest weekly jump in petroleum inventories for nearly 30 years. At time of writing West Texas is trading at just under USD52 a barrel, down from over USD66 a barrel in late April.

The Daily Update - Eurozone Double Disillusionment

The Daily Update - Eurozone Double Disillusionment

Eurozone markets have been given a dual wakeup call in Italy and Greece. Just days after Greece’s 10-year yields hit all-time lows of 2.85%, the European Commission has warned that they may not meet their post-bailout budget targets. The warning reflects the loss of focus from the Greek Government. After exceeding their primary surplus target for 2018 – targeting 2.5% and achieving 3.5% – and promising to meet the target up until 2022, Tsipras has since begun a series of expansionary fiscal measures with more in the pipeline.

The Daily Update - Sell in May and Go Away

The Daily Update - Sell in May and Go Away

As we enter the first week of June and looking at the US Treasury market, it’s hard not to think of the old stock market adage ‘Sell in May and go away’. This morning the ten-year is trading at a yield of 2.08%, that’s 52bp lower than just six weeks ago. So does that mean the economic environment has changed dramatically or that the market was wrong to push yields up to the elevated levels of last year?

The Daily Update - The UK Has a Visitor / China Points the Finger

The Daily Update - The UK Has a Visitor / China Points the Finger

China’s State Council of Information yesterday released a white paper stating that the US government ‘should bear the sole and entire responsibility’ for the breakdown of trade talks between the globes two largest economies. It also hit back at Trump’s allegations that China has backtracked on promises that it had made in earlier negotiations. The paper states that as with all negotiations, it is common practice to make adjustments and add proposals during the course of the talks, as the US has done, however, China believes ‘The more the US government is offered, the more it wants’. Nevertheless, Beijing does remain ‘committed to credible consultations based on equality and mutual benefit’ but would ‘not give ground on matters of principle’.

The Daily Update - Diverging and Record Low Yields

The Daily Update - Diverging and Record Low Yields

2-year US Treasury yields dropped below 2% today, putting the curve between 2 and 6-year bonds at least 50 basis points below the Fed Funds Target Rate (upper bound). Meanwhile, German 10-year Bund yields hit all-time lows of -0.206%: even lower than the negative yields back in mid-2016 when the US 10-year yielded 1.35%. In comparison current US 10-year yields are hovering just above 2.15% - after a steady fall over May from 2.5% - still 80 basis points above their mid-2016 lows.

The Daily Update - Misinformed Bears

The Daily Update - Misinformed Bears

Bond bears are jumping on the poor result of the US Treasury seven year auction yesterday as a sure sign that the market has priced far too much into this current rally. That may be so but the auction should be seen in the correct context. We have a holiday-shortened week and have already had $81bn in supply from the Treasury in the two year and five year maturities on Tuesday, with very good results from both auctions, especially the two year. So what is happening here?

The Daily Update - Term Spread at Record Lows

The Daily Update - Term Spread at Record Lows

US Treasury 10-year yields have fallen below 2.24% and are at their lowest in 20 months; 30-year yields at below 2.68% are just a couple of basis points from surpassing lows of 2017 to mark 30-month lows. More notably, the Fed term premium (vs 10-year) at -0.79 is now at the lowest since data started in 1961, and in the US dollar swaps curve the 50-year yields are around 19 basis points lower than the 3-month yields (2.34% vs 2.53%).

The Daily Update - ME Interest

The Daily Update - ME Interest

Interest in Middle Eastern bonds has ballooned this year allowing the Gulf Arab States to issue almost three times the amount of debt since the beginning of the year when compared to last year. According to Bloomberg around $51bln in bonds and Islamic securities have been issued including the $12bln of issuance for Saudi state run Aramco, which is thought to be the most oversubscribed offering in history, with interest rumoured to be over $100bln in the initial offering.

The Daily Update - US Considers Tariffs on Undervalued Currencies

The Daily Update - US Considers Tariffs on Undervalued Currencies

The US government is said to be considering proposing tariffs on goods from those countries it deems to have undervalued their currencies in order to get the upper hand when exporting to the US. The idea of countries manipulating their currencies is nothing new, Trump has long accused China of such things, in a roundabout way, however, his administration has been looking at how to take a more aggressive approach to the situation. The US Commerce Department said its proposed rule change would amend the normal countervailing duty process to include new criteria for currency undervaluation.

The Daily Update - FOMC Minutes

The Daily Update - FOMC Minutes

The 30 April/1May FOMC meeting minutes were released overnight.  Despite them coming from a meeting held days before the latest escalation in US-China trade tensions the market still billed them as one of the key focal points hoping perhaps for a glimmer of insight or support for current market expectations: ahead of the release the Fed Futures was predicting ~70% chance of a rate cut before the end of the year.

The Daily Update - A Genius When It Comes To Making Matters Worse

The Daily Update - A Genius When It Comes To Making Matters Worse

May just never seems to be Theresa May’s month, in a strain against nominative determinism. As Brexit fears crescendo again in the approach to European Parliament elections – and as sterling falls 4 pence from ~1.31 to 1.27 – yesterday Prime Minister May daringly offered MPs a vote on a second referendum to go alongside her revised deal. Tim Shipman, political editor for the Sunday Times, tweeted that “Theresa May’s speech sounds like a kidnap victim reading out the demands of her captors”.

The Daily Update - Footwear Giants Warn Trump

The Daily Update - Footwear Giants Warn Trump

Adidas, along with Nike and other US footwear giants have signed an open letter to US President Trump urging him to reconsider his policy of trade tariffs against China, which the industry believes would have a devastating effect on its market. In all, 173 companies have signed the open letter, which as well as being posted on the industry trade association's website, was also sent to Larry Kudlow, director of the National Economic Council, Steve Mnuchin, the Treasury Secretary, and Wilbur Ross, the Commerce Secretary.

The Daily Update - Turkey Republic vs Microsoft

The Daily Update - Turkey Republic vs Microsoft

During our selection process one of the most important factors of selecting a bond, aside from the country's Net Foreign Asset (NFA) position, is the risk-adjusted return; we use the expected return and yield, and notch protection as two of the main identifiers. Although we do not typically invest in sub-investment grade bonds across our portfolios, we do still monitor them; especially as we can hold junk bonds in one of our funds.

The Daily Update - Demographics and Growth

The Daily Update - Demographics and Growth

Provisional estimates from the CDC on US births and fertility highlights the demographic challenges facing the US. The number of births declined 2% in 2018 to 3.788m, the fourth year in a row of decline and the lowest level for the past 32 years. The general fertility rate also hit a low falling 2% from 2017 to 59 births per 1,000 women aged 15-44 reflecting a decline in birth rates for women under 35.

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