Market Talk – May 25th, 2017

Core Asia opened on a positive note following constructive observations from the FED minutes, the addition of apparent OPEC commitments and the lack of market reaction following Moody’s downgrade of China sovereign. Ahead of the long weekend scheduled in the US, the enthusiasm to invest appears positive even as we chase market sentiment. Have we finally woken to the fact that rising rates is a sign of strengthening economic conditions, with investors finally concluding emergency low rates are no longer warranted. The target now is to normalise rates as quickly as possible with as little direct market impact as possible. The Nikkei and ASX closed +0.4%, Hang Seng’s large Caps closed +0.8% and a strong close for both Shanghai and SENSEX at +1.5% the pair.
European markets were trading in a flat range until the price of oil started to move lower and then stocks drifted in sympathy. With much riding on the OPEC meeting, the expected news was for coordinated supplies and that agreement to extend way into 2018 together with additional production cuts. However, this was not to be the case and hence WTI fell over 5% on the day. One of the big movers was Petrofac (oil and gas production and processer) its stock fell 30% today on talk that its COO had been suspended pending investigations. FTSE, DAX and CAC all closed little changed whilst the IBEX closed +0.3% with FTSE MIB closing -0.4%.
We saw all time highs again today for the S+P and the NASDAQ but not the Dow. The market again is happy to accept the FED unwinding its balance sheet and is even accepting of a June rate increase. As we head into the long weekend news of President Trumps first trip appears to have been successful by all accounts outside the US press. The VIX has been hit again and was last seen trading 9.85. Strong earnings continue to dominate with banks also joining the fun this week (+2%). Being a Thursday we saw Jobless Claims (+234k) and remains around lowest levels in almost 40yrs. It will be difficult for Traders to run risk over the long weekend as middle of the afternoon we see the volatile Durable Goods release. Also, Q1 GDP, PMI and Consumer Sentiment are to be released which will probably be the make or break of this weeks revival in prices.
2’s closed 1.29% (+1bp), 10’s at 2.25% (u/c), 30’s 2.92% (u/c). Germany 0.36% (-4bp) which closes the spread at +189bp (+4bp). France 0.79% (-4bp), Italy 2.10% (-2bp), Greece 5.89% (-6bp), Turkey 10.27% (-5bp), Portugal 3.16% (-2bp), UK Gilts 1.04% (-3bp).
The demand for yield continues to force yields lower as all emerging markets tend to follow the core lower (yield).