Never a dull moment. Stocks, unable to escape negative soundbites from the President, ended the week on a down note. Stocks traded off on Friday as President Trump warned that talks scheduled for September with China might not happen.
MY TWO CENTS
- The current state of affairs… foreign affairs. After a week of whipsawing markets all pushed and pulled by currency wars and increasing rhetoric on trade, one wonders where this whole thing is going. One thing is for sure, things don’t appear to be going so well. By now, the world is familiar with the “shock and awe” negotiation tactics used by the President in which he goes straight for the jugular with a big threat, causing panic in his opponent (and the markets), only to change course by lifting the threat last minute. Initially, the tactic served to get China’s attention, as intended. However, now we are later in the game and the threats are largely beginning to be ignored by China, frustrating the administration. Left with no other alternatives, the President was left with only a list of consumer goods to tax, knowing that the move would have the most impact on everyday people in the US. China for their part, chose to shift the conflict from a trade war into a finance war by allowing a currency devaluation, essentially sucking in all of its foreign trading partners. Moves by both sides have the hallmarks of desperate frustration and certainly not of two countries who are close to a deal. The Chinese economy is struggling with slowing growth as a result of cyclical factors and the trade war. The most recent proposed tariffs would surely affect the Chinese economy, but falling demand due to higher taxes could be offset with a weaker currency. From that perspective it appears that the PBOC’s move to allow the Yuan to travel above the 7 level appears to be quite calculated. A far cry from the, now overused, shock and awe strategy. Many now believe that the Chinese Government is taking the slow road, waiting for the US Presidential elections with the hopes of dealing with a Democrat.
- Economy paused. The US domestic economy continues to throw off benign signs, giving hope to both stock bulls and bears. On the bond side, it’s mostly bulls who have been rewarded. While there are certainly signs that the economy is faltering a bit, particularly in manufacturing, consumer optimism remains healthy and spending continues. Unemployment appears to be pegged at a perpetually low level with no real signs of wage pressure. Finally, inflation has let up significantly in the past 12 months. Things are not great, but not bad either. The economy appears to be on a tipping point in which a resolution of the trade war and further Fed stimulus could re-ignite the US Economic machine (in essence a soft landing followed by a bounce), or businesses will stop hiring and spending, spooking consumers who will stop buying, sending the economy into a recession. Stocks appear to be indicating the bounce, while bonds appear to be indicating a darker outcome. Both sides will have to wait 37 days until the next Fed meeting. Lots can happen in that time frame.
Stocks sold off on Friday, closing off their daily lows, in response to some negative trade rhetoric by President Trump early in the day. Meanwhile US companies hoping to resume trade with black-listed Chinese telecom equipment giant Huawei were beaten up on Friday after the Administration announced that it would not allow a reversal of the moratorium. The results can be seen in the semiconductor sector, which fell by -1.72% in Friday’s session. The S&P 500 fell by -0.66%, the Dow Jones Industrial Average dropped by -0.34%, the Russell 2000 sank by -1.25% closing below its 200 day moving average, and the NASDAQ Composite closed off by -1.00%. Bonds pulled back slightly and ten-year treasury yields climbed by +3 basis points to 1.74%. Stocks are currently indicating a soft open in response to growing tensions in Hong Kong.
– No major economic releases are scheduled for today, but the week ahead has Consumer Price Index, both Philadelphia and New York regional Fed reports, Retail Sales, Industrial Production, Housing Starts, and the University of Michigan Sentiment Index. Please refer to the attached economic and earnings release calendars for details.
– Sysco will release earnings before the bell and we will hear from Bloom Energy after the close. A slow start to the week for earnings but still some market movers later in the week.