About face. Stocks jumped yesterday as China fixed its currency at the weakest point since 2007, but not as bad as the market was expecting. China’s greater-than-expected currency fixing combined with better-than-expected export data eased trade jitters and stock traders celebrated by bringing indexes into the black for the week.
MY TWO CENTS
- Fact: there actually is a global economic slowdown occurring. Sometimes if the same line is repeated too often, it begins to be accepted as normal and is subsequently ignored. The Fed has been talking about “cross currents” and “headwinds” since Powell made his Boxing Day dovish pivot. Ever since then, it has been a battle cry for bears (who are losing the battle) and Fed bullies who want to see lower rates. If you add in a little home-country bias, investors see the US Economy looking a little tired, but far from out of the race. GDP continues to grow, job creation continues, unemployment is low, interest rates are coming down, and inflation is under control, so why worry? WHILE YOU SLEPT UK’s GDP came out and surprisingly shrank by -0.2% as the reality of Brexit begins to take its toll on the economy… it will get worse. Additionally Germany (which makes up more than 20% of the EU’s Budget and has a GDP 1.4 times greater than the UK and France) announced that its exports fell the most in three years as its manufacturing sector has been hit by the trade war. Finally China announced yesterday that its producer price index fell by -0.3% year over year reflecting its slowing economy.
- Hell-bent on destruction… or a resolution. Last week the trade war between the US and China took a negative turn as President Trump announced that the US would be adding a 10% duty on $300 billion in consumer goods, in addition to the already existing tariffs. China’s response came over the weekend as it expanded the fight into the currency markets. By doing so, it not only affects the US dollar but also all other trading partner currencies. Later in the week New Zealand, India, and Thailand all made surprise accommodative interest rate moves. Remember that lower interest rates lead to weaker currencies, which help countries who rely on exports. So one can argue that China’s move in currencies has now dragged in a whole new cast of characters, least of which is the US Fed who will be pressed to act with further cuts. Remember Huawei, China’s largest telecom equipment maker which was put on a list of unfriendly companies? Being on the list prevents many US suppliers from doing business with them, so not only is Huawei negatively impacted, but also its US suppliers. The Administration has been considering relaxing its restrictions to allow some manufacturers to resume business ties with Huawei, but last night WHILE YOU SLEPT, the Administration announced that it would not lift any of the restrictions in response to China’s stopping of US Farm products. The battle rages on.
THE MARKETS
Stocks popped yesterday as somewhat positive news emerged from China. Investors continued to take it as a cue to go shopping for oversold stocks. The S&P500 climbed by +1.88%, the Dow Jones Industrial Average surged by +1.43%, the Russell 2000 advanced by +2.1%, and the NASDAQ Composite popped by +2.24%. Bonds eased off a bit and 10-year treasury yields slipped by -1 basis point to 1.7%. Gold continued to have bid, trading up to $1501 / oz as it is a safe haven asset in a trade war evolving into a currency war.
WHAT’S NXT
- The Bureau of Labor Statistics will release its Producer Price Index for July and it is expected to be unchanged at 1.7% year over year. The PPI Excluding Food and Energy is expected to be unchanged at 2.3%.
- Next week we will get Consumer Price Index, some regional fed indexes, housing numbers, Advanced Retail Sales, and a preliminary read on University of Michigan Sentiment.
- This morning we will hear from PG&E before the bell.
Have a great weekend!