Thursday, March 22, 2018
Contributors: J.Price, C.Basinger, D.Benedet, C.Kerlow, D.Mak, S. Obata


Little old fashioned risk-off day in the markets this morning.  Stocks are lower, just about everywhere, with bonds trading higher.  The Fed was the topic yesterday, with a 25bps rate hike and comments around the future path of hikes plus the economy. There is also a new spending bill floating around as they run out of money again Friday.  If we had a nickel for every time this U.S. government shut down this year, well we would have 3 nickels if it happens again this weekend. 
Trump is set for a China tariff announcement later today, aimed to curb the theft of U.S. technology. These additional measures coupled with the threat of retaliatory Chinese tariffs have the markets nervous that we’re just one step closer to an impending trade war. The dollar has been getting punished, while the safe harbor of bonds is back in demand. Yields are lower across the globe as we write. The lack of any firm language from the Fed yesterday on the potential of an additional rate hike this year has given bond buyers a sense of reprieve.
In terms of striking back, Bloomberg provides some of the targets that are most vulnerable to Chinese retaliation. Besides agriculture, aircraft and software could be in the crosshairs.
We got a glimpse of into the state of European manufacturing this morning. IHS Markit has published preliminary estimates for economic growth in France, Germany and the Eurozone. We’re seeing misses across the board, which along with deteriorating business confidence in Germany has shares down across the pond well over 1%.
Diversion: A few day’s ago Jeff Bezos took the latest Boston Robotics dog for a walk. This video shows a brief glimpse at what the robot sees.


The shareholders have spoken and award Tesla CEO, Elon Musk a compensation package worth $2.6bb based on the value of his stock options. However, not all shareholders were in agreement. The Norwegian Wealth Fund, valued at $1 trillion, voted against the package. They own 0.48% of Tesla. Naspers, a South African newspaper and pay TV operator is selling $10.6bb worth of their $175bb stake in Tencent, Asia’s most valuable company. Back in 2001 they bought $32mm in the company, which inevitably changed their future. AutoCanada is buying Grossinger Auto Group for $110mm adding four new brands to their portfolio and giving them exposure to the U.S. BlackBerry has entered an agreement to Jaguar Land Rover develop new technology. This another win for BlackBerry’s QNX car software unit.

Seems like Toys R Us is being salvaged by Bratz Doll billionaire Issac Larian and many other investors who have pledged $200mm in financing and who hope to raise 4x this amount in crowdfunding to bid for up to 400 stores awaiting liquidation. Airbus is to announce a new CEO by the end of the year via an independent selection process. Conagra saw a profit boost in Q3 from frozen food sales and fewer discounts, beating the analysts’ estimates and raising its full-year profit forecast simultaneously.


Oil is down -0.64% to $64.75  . WTI is pulling back after a big rally to start the week. Rising tensions in the Middle East, falling supply in Venezuela and a weakening USD have been supportive. USDJPY is at new lows for the week while EURUSD has been moving higher since late Monday.

Gold is up 0.76% to $1,337.40  . Precious metals are trading just below the highs for the week. Both gold and silver jumped higher following the FOMC statement, which prompted rates to kneejerk higher and then to reverse course. Real rates have stopped increasing as nominal yields pullback and breakevens stall. Typically, this is bullish for precious metals.

In other commodities news…

Oil retreats after hitting six-week highs near $70 a barrel” – RTS

China's oil futures: frazzle or dazzle for foreign traders?” – RTS

Here Are U.S. Targets Most Vulnerable to China Trade Retaliation” – BBG

Commodity traders warn over environmental rules for shipping” – $FT

Corn, soybeans, or something else? The U.S. farmer's dilemma: Braun” RTS


Intraday volatility was stoked in yesterday’s session on the heels of the FOMC’s monetary policy update that saw equities (bonds) move higher (lower) initially before closing in the red (black). The 25 bps hike takes the overnight range to between 1.50%-1.75% and the most expensive for short term funding since late 2008 (as an aside, one wonders when the Fed will officially do away with the operating band implemented at the height of the financial crisis). The final Committee vote was unanimous for the move as well with the language in the accompanying statement carrying a neutral tone but supportive of tighter policy. Major changes to the text included describing recent growth in economic activity as “moderate” instead of “solid”, completely removing any mention of the unemployment rate being low, and accelerating the likelihood of meeting inflation targets to the “coming months” from “this year” previously. This latter point was the main sticking point that markets gleamed in Chair Powell’s post-announcement press conference --- that he is driven to see “inflation reach target levels as quickly as possible”. A new dot plot pattern was also carved out that now sees the Fed's rate forecasts increased +0.2% in 2019 to 2.9%, +0.3% in 2020 to 3.4%, while the terminal rate was edged higher to 2.9% from 2.8%. Biggest takeaway here was that 2018 was kept at 2.10% and unchanged from December --- signaling that just two more rate hikes are in the cards for the balance of the year.
Three market reactions were worth noting post-Fed in addition to the aforementioned reversal in equity and debt asset prices. For starters, Fed Funds futures dropped their probability of a fourth rate hike in December from 6.6% to 3.9% while keeping the June 13 and September 26 meetings for the remaining increases this year. Translation --- you’ll see higher rates but we’ll pause for a while after that. That lowered yields significantly on the short end of the curve with 3 month TBILLS losing almost five bps from its high, two year Treasuries lopping off four bps, and the long end more expensive by two bps. Secondly, the USD/CAD cross fell all the way to below 1.2900 by day’s end helped partially by the +3.1% rally in WTI (and well above its symmetrical triangle by the way!) but mostly by the dovish slant on 2018 hikes. Combining this with the improved talks surrounding a NAFTA resolution earlier this week, and you just know that Morneau and Poloz were breathing a collective sigh of relief knowing that they don’t have to hike the BoC overnight rate too quickly just yet (OIS spreads indicate the greatest likelihood happening at the May 30 meeting, though at less than 50% odds). Lastly, much has been made of the recent advance of the three month LIBOR-OIS spread differential that rose to +55.51 bps yesterday. Recall that the spread is a harbinger of tightening credit as the cost of interbank lending (LIBOR) widens versus swap rates tied to Fed funds (a proxy for where central bank policy is headed). The larger this number gets, the more expensive it is for banks to borrow, who in turn will pass this higher cost to consumers in the form of loans. Higher borrowing costs translate into an erosion of consumer wealth and the last time the spread was this wide occurred in early 2009. Stay tuned.



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