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September 30, 2019

Flashing Teeth

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<span id="hs_cos_wrapper_name" class="hs_cos_wrapper hs_cos_wrapper_meta_field hs_cos_wrapper_type_text" style="" data-hs-cos-general-type="meta_field" data-hs-cos-type="text" >Flashing Teeth</span>

Flashing teeth ^^^  Stocks tumbled on Friday after a report surfaced that the Whitehouse was considering a plan to limit US investment in Chinese companies.  Benign economic data was not enough to prevent the selling as trade fears crept back into the markets.

 

MY TWO CENTS

 

  1.  What now?  Trade discussions between the US and China have followed a relatively predictable path over the past several months.  Discussions on, discussions off, US increases tariffs, China raises new tariffs, US shows some leniency, China shows some leniency, Chinese come to the US to visit farms, China abruptly changes travel plans and cancels…. and so on.  Just last week Trump lambasted China in his UN General Assembly speech just as China was placing new orders for US soybeans and pork (though the move is more practical than conciliatory - see my notes from last week) and in the same day Trump was quoted as saying that a trade deal with China may come “sooner than you think”.  Markets go up and down with each positive and negative report, tweet, rumor, and statement… you get the picture.  On Friday, something very different shook out.  Bloomberg reported that the Whitehouse was considering curbing US investment in Chinese companies.  Under consideration was the delisting of Chinese companies on US exchanges and obstructing US Government pension funds from investing in Chinese companies.  Wow, that can be significant, considering that the 150 or so Chinese companies that trade on the US exchanges have a combined market capitalization of $1.2 trillion.  As you might guess equities traded off on the news with the biggest losers list being topped by Chinese tech companies.  Over the weekend, WHILE YOU WONDERED WHEN THE LEAVES WOULD START TURNING, the Administration issued a statement that said that they had no plans to issue any investment curbs in Chinese companies.  So what gives here?  Stepping back, it would seem that the Whitehouse was simply sending a message to China that it has more tools to pressure them into a deal.  With Vice Premier Liu scheduled to visit the US next week to resume high level talks, one wonders why the Whitehouse would want to send a negative message, especially one that would pack such a big punch.

 

  1. A mountain of debt.  I have been writing about the large amount of bond issuance that has been occurring over the past several weeks.  Record supply has tightened up the overnight lending market and even caused weakness in the overall bond market.  The move makes sense as companies clamor to lock in long term borrowing at these low rates.  So far in September, investment grade companies have issued $168 billion in new debt, which is a monthly record.  Many economists, including those at the Fed are a bit nervous about the swelling amount of corporate debt, which now exceeds $6.4 trillion.  Chairman Powell has warned that the record corporate debt could amplify the effects of a recession.  The silver lining is that this month’s record issuance is in investment grade, which means that companies are less likely to default on the obligations.  Lower quality debt issuance, while still quite high, has been showing some signs of slowing as investors become more cautious and lower yields look less tempting for the assumed risk.

 

THE MARKETS

 

Stocks sold off on Friday as trade fears of a new kind entered the market.  A report that the Administration was considering curbing US investment in China sent stocks into a tail spin.  The S&P500 dropped by -0.53%, the Dow Jones Industrial Average slipped by -0.26%, the Russell 2000 traded off by -0.84%, and the NASDAQ Composite Index tumbled by -1.72%.  Bonds went up and 10-year treasury yields slipped by -1 basis to 1.68%

 

WHAT’S NXT

 

- MNI Chicago PMI is expected to come in at 50.0 down from last month’s 50.4.

- Dallas Fed Manufacturing Activity is expected to be at 1.0 versus last month’s index reading of 2.7.

 

COME VISIT ME!

 

I want to remind you that I will be visiting with clients in our Boca Raton and Miami offices all week and I would love to spend some time with you.  Please reach out to me to set up an appointment.

daily chartbook 2019-09-30