Morning 5-31

All sorts of bad news overnight:

Trump Announced 5% tariffs on All Mexican goods starting June 10 and ability to raise them to 25% on October 1st if Mexico does not stop the Flow of illegal immigrants. Now the president is using tariffs as a Political weapon and not strictly as an Economic one, this is taking tariffs to a different level and likely to make it difficult to get any trade deals done as Countries worry about tariffs being levied for any reason. China said they have complied a list of Companies they call “unreliable” entities, a blacklist of companies that China may ban from doing business with Chinese companies. Lastly, the first of China’s manufacturing PMI missed expectations and slipped back into Contractionary territory. U.S. China trade deal appears less lily by the day, tariffs in Mexico will disrupt U.S. Supply chain as many preliminary goods are made in Mexico shipped to U., S. then assembled into final goods and exported, Mexico second? Biggest trade partner of USA

Markets=Risk OFF

 2,3,and 5s yield less than 2%,Bunds yields at all-time lows -.213%  72% probability of a September rate cut! It was 58%  3 days ago. These tariffs and Actions by trump are causing markets to aggressively  price in a recession/Global slowdown, Spoos ,Dow ,and Nasdaq all lower by >1%, Dax -1.8%,>Mexican peso -3.2% and Surprisingly Shanghai  Close little changed. Oil is being used as proxy for global slowdown WTI -2.1% Brent -2.7%… grains a bit lower I will  be  watching the Livestock open; we do sell plenty of cattle and hogs to Mexico

 Today should be an interesting day, Month end action, tape watching for any retaliatory move from Mexico or China. Economic calendar shows PCE core and Michigan revision.

From IFR news

Things are moving into uncharted territory making it very difficult to be involved in the markets or even analyze them with much coherence. The new news is that President Trump is threatening to impose tariffs on all imports from Mexico unless they agree to close their border with Guatemala and otherwise stop the tide of immigrants from Central and South America moving through Mexico to the US.

The first round of tariffs is scheduled to go into effect on June 10 at 5% and be ratcheted up in 5% increments to potentially reach 25% by October. Financial markets, and especially global sovereigns, are showing a high degree of alarm on the news. The first-order conclusion is that such actions will most likely put an already listing global economy into recessionary peril. The second-order effect is that such actions invite retaliation with an ever-escalating quid pro quo.

Rather than a precision strike, the adoption of this no-holds-barred approach by the White House can be expected to be their new foreign policy blueprint. As said, there appears to be a desire on the US’s part to reshape the current world order economically, militarily and strategically (national security). It’s an updated version of Manifest Destiny, if you will, where the US remains king of the hill by tending to and focusing on its own perceived needs. Principle and philosophy, where the ends will justify the means.

With the White House having a litany of global grievances, it is likely just a matter of time before others (EU, Japan, and Iran, etc.) are brought into their crosshairs. This suggests that this “story” is apt to have a very long shelf life and plague the markets in a risk-off fashion ad infinitum. Whether or not the approach and eventual outcome is the best for the all concerned appears as highly debatable. The markets are currently debating this through their price actions and are coming down on the side of apprehension.

As the Fed has made financial stability one of the unwritten mandates, they may well be brought into the fray, cutting rates sooner than the actual economic data would warrant. Again, the treasury market itself will continue to price in this expected eventuality.

As all this is occurring, treasury market dynamics/technicals remain incredibly strong and set to get even stronger. This is mainly due to the relative paucity of global sovereigns with any semblance of a yield. As global yields continue to move lower the universe of negative/very-low yielding sovereigns continues to expand. This in turn has global asset managers continuing to increasingly favor the treasury market as there are fewer and fewer substitutes.

In a sense such a bond market backdrop should prove somewhat supportive to the equity markets as a portion of the glut of money looking for a return may well venture into riskier equities due to the lack of other viable options. The legions of dip buyers in bonds can only be expected to grow by the day.


Always can find some excuse for the gyrations in oil a few excuses or reasons for today’s drop.Front month July expires tomorrow possibly position adjustments under way, Weekly gasoline storage data showing a bigger build,Rbob -2.83%.Just coming across twitter via WSJ U.S. will allow some countries to continue import Iranian oil till past quotas are met. position adjustments due to Front month Brent Cal has been on an impressive run higher also Brent Cl spread touched 1 year lows earlier this week and the turn around in spreed since very impressive.

N/Q spread
generic front month CL/Brent spread Still using July as front


…Is a basket of stocks that have Low BBB rated Debt with negative to stable outlooks .(Bloomberg ) With Growing chatter that business loans/corporate debt may be that next catalyst for economy Downturn this chart proves quite useful. below is the MS basket along with SPX overlay chart with 20 day Correlation underneath .Something to keep an eye on as the correlation between the two is increasing since The First of May


S X9/C Z9 ratio bounced a bit yesterday but the trend has been down and it has been strong I would imagine some support at 2 , last time spread below 2 March 2016.Spread indicating a smaller corn crop is expected.


From Morgan Stanley

 Yesterday, China reacted to the US Treasury report on FX policies of major trading partners by saying “the US is not in position to decide whether a country is a currency manipulator”. Meanwhile, the US Pentagon is seeking funds to reduce the US reliance on China’s rare earths. It seems the tone has become less constructive. China is unlikely to head for a compromise at this stage, suggesting that it may require the US to make the first step in improving relations. Late last year, it was the falling equity market prompting President Trump to reach out to President Xi.

 Stock Bouncing a bit today  Spoos in middle of range +6 handles, Dax +.3% Shanghai -.3%. Treasuries Lower, Bunds steady some of the overnight weakness caused by a big move lower in JGB has, Japans benchmark bonds as yields move higher due to some concern regarding BOJ bond buying program. Dollar index sideways stuck in a tight range as markets await the second Look at Q1 GDP, a Number that should not have much lasting impact on today’s trade. The Vice chair of the fed Clarida speaks at 11:00 to the economic club of New York Attention must be paid. President trump will be speaking later today as he gives commencement to the Air Force graduates so as usual all eyes will be on news wires to hear anything regarding China in Speech and to reporters. I believe treasury complex a bit too aggressive in pricing in rate cuts by Fed so a bit of a pullback in prices today. Be aware that Chatter is growing that Trade war is turning into something bigger, which is much scarier.

 Oil Sideways WTI steady to higher as API reported a bigger draw then expected and Brent Down .9% Crude Oil Brent spread trading higher with a vengeance today after yesterday’s swift turnaround. Copper -.6% grains a touch higher this morning as all sorts of worries regarding the size of US crop outweigh any statements that China has stopped goodwill purchases of US soy .

Tonight at 8:00 China PMI will be watched to see health of Economy

German Unemployment??

Plenty of Buzz regarding this number this morning as it shows a massive jump in the Number of unemployed people in May.But fear not German Economy not collapsing it is some type of Reclassification of workers that caused the Jump shown on graph below.