ALL CHANGE

Trading on Monday followed an unusual pattern. Stock index futures sagged over prospects for a trade war between the United States and China. If the two nations escalate tariffs on imports from each other, conceivably global trade would slow.

Stocks could slump and the dollar would rise and we'd be back precisely where we began and political maneuverings to mend the financial shenanigans would be lost at the door of protectionism. However, before the end of the day stocks in the U.S. had reversed course and led the S&P 500 index to a new high for this move.

Curiously even in the face of this possible protectionism and what it could mean for yet another slowdown cycle, bond prices looked heavy all day. As stocks were down ahead of the bell so too were bonds. Hardly the kind of risk aversion knee-jerk one might expect. If growth slows through protectionism, you could expect the cost of debt to fall.

But as stocks overcame the Monday blues, treasury notes got stuck in a rut and lost half a point sending yields up to 3.43%. As investors soaked up $70 billion in auctioned notes by the government last week, yields slipped to 3.31%. This week it would appear that those same investors are suffering from a little indigestion.

The dollar held its own on Monday but is still pretty close to the lowest point of the year. There was very little in the way of a respite for it as equity prices spent the entire day rising from a weak opening.

Mining and commodity stocks dropped in Asian trading as commodity prices fell, which helped accentuate the opening slide. However, the price of gold refused to surrender its recent ascent above $1,000 per ounce. Meanwhile crude oil prices remained depressed on the day.

We think that this continues to speak volumes about the prospects for the dollar and inflation in the months ahead. Many gold investors are beginning to feel that even its recent ascent might be overdone and are calling for a pullback. Still, a widening in the budget deficit that would undermine the dollar is likely to keep any buying opportunities to a minimum.

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