Lame Dux Bellorum

By Benjamin Picton, senior market strategist at Rabobank

The NASDAQ and S&P500 rallied on Friday despite a stronger-than-expected payrolls report helping to push Treasury yields higher. The Treasury curve bear flattened as two-year yields rose by 5bps, and ten-year yields lifted by 2bps.

There was a strong hint of bargain-hunting as investors again piled in to tech stocks that had been brutalised in the previous session, thereby perpetuating a recent volatility spike that AI-trade sceptics will be tracking with great interest. By contrast, the less glamorous and more value-oriented Dow Jones index posted a fall of 0.46%, led lower by a consumer discretionary sector that was less than enthused by the increased prospect of Fed hikes.

Oil prices were little changed on Friday with Brent closing just above $98/bbl and WTI sitting a little above $90, but Brent is being offered in early trade today. Oil prices fell by almost 16.5% over the course of last week as a war-weary American electorate delivered a Democratic sweep of the House of Representatives, the Senate, and some longshot Gubernatorial races.

President Trump now faces a hostile Congress and the prospect of serving out the remainder of his term as a lame duck. Those legislative constraints will likely kill off Republican hopes for fiscal expansion, particularly the planned increase in military spending to $1.5trn. Bond traders might be breathing a sigh of relief on that score, but loss of influence over domestic affairs only increases the likelihood that the focus will be on foreign policy from here on out.

Increased legislative constraints are sucking some war premium out of the oil curve, but higher freight and insurance prices add cost to every marginal barrel and limit how far prices can fall.