August 6, 2019
We closed yesterday with stocks hovering a little more than one percent away from big technical support (the 200-day moving average) in the S&P futures. A test and hold of that line would give us about an 8% correction in seven days.
That big support level (the purple line) did indeed test overnight, and we had a huge bounce as you can see in the chart below …
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The test of the 200-day moving average came early Monday evening, after news hit the wires that the U.S. had officially labeled China a currency manipulator.
So what did China do with the yuan last night? The risk heading into the night was that they would continue the devaluation (maybe something much bigger). Instead, they eased the tension, moving the yuan back below 7. And PBOC officials were out reassuring companies the currency would be stable.
That was fuel for stocks today. From the lows overnight, S&P 500 futures rose almost 4% by the New York close. But it was far from "risk on." Gold continues to make new highs. And treasury yields continued to make new lows (closing closer to the lows of the days on the 10-year). Now, the consensus opinion going around today, on this step to label China a currency manipulator, is that it's futile/ ineffective. What does it do? It draws global trading partners into the fray, via the IMF and WTO membership. The WTO will be forced to make a judgement on China. That ups the stakes for China, with the prospect of being put into the global penalty box.
Here’s an excerpt from a Congressional Research Service white paper, Currency Manipulation: The IMF and WTO…
"Unique among the major international trade and finance organizations, the WTO has a mechanism for enforcing its rules. If a country believes another country has violated WTO rules, to its detriment, it may request the appointment of a dispute settlement panel to hear its complaint. The other country cannot veto the establishment of a panel or adoption of a WTO decision by WTO members. The panel reviews the arguments in the case and renders judgment based on the facts and WTO rules. If the losing party does not comply with the ruling within a reasonable period of time, the WTO may, if requested by the complaining party, authorize it to impose retaliatory measures (usually increased customs duties) against the offending country or to take other appropriate retaliatory measures against that country’s trade."
Can the U.S. withdraw this claim? It appears so, rather easily. Which could be a bargaining chip to get back to the negotiating table.
August 5, 2019 China made an important move in it's currency overnight. It was clearly a political response to Trump's threat of tariff escalations.
That has sent some shock waves through global markets. Let's talk about why it matters and how it may play out. It's nothing new to see China walking down the value of the yuan. Managing a weak yuan has been the centerpiece of the economic plan that has driven their ascent from relative insignificance, to the second largest economy in the world (over the past twenty-five years or so). So, predictably they've turned to their trusted economic tool, a weak currency, to offset tariffs. Since Trump's bark turned into bite early last year, China has devalued the currency by 13% against the dollar in response to tariffs. This has been expected, and it has happened, but it becomes concerning for global market stability when the prospects of a big one-off devaluation increase. And that's what happened overnight. That's why global markets have been shaken. Remember, back in August of 2015, the Chinese surprised markets with a devaluation of the yuan. It was (also) a modest adjustment in the currency, but global markets fell sharply on the prospects that a big one-off devaluation may follow, to support their flagging economy. It didn't happen then and shouldn't happen now. It would be a deadly move for China. It would be an affront to, not just the U.S, but to all global trading partners. And that would likely induce a more global response against China's trade advantage. China would be put in the global penalty box. That would be damaging for the global economy, but the biggest loser would be China. With that, I suspect this will prove to be a warning shot. And perhaps it will bring both parties (the U.S. and China) back to the negotiating table this month (i.e. sooner rather than later). In the meantime, as we've discussed in my daily notes, Bitcoin continues to be among the big winners when the yuan is weakening. Bitcoin was up 13% today. As I've said, the rise in Bitcoin has everything to do with money moving out of China, and less to do with Silicon Valley genius/ global monetary system disruption. Bitcoin futures and off-exchange (peer-to-peer) trading are liquidity sources for Chinese citizens, allowing them to circumvent government capital controls (which restrict individuals from moving more than $50,000 out of the country a year). With that, as we've discussed, the Bitcoin bubble may not deflate until/unless Trump makes concessions to do a deal. In addition to the yuan, the chart to watch tomorrow (and overnight) will be U.S. stocks. |
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August 2, 2019 We have global monetary policy now pointing south (including the Fed). And the perception of an indefinite trade war, feeds the market's belief that global central banks will do more (maybe a lot more).
That puts gold back into the crosshairs. Gold was among the biggest movers yesterday. |
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As you can see in the chart, gold has broken out of this sideways range of the past six years.
We're still about 35% away from the 2011 highs. Those highs were, of course, induced by fears that QE would lead to runaway inflation. Inflation didn’t materialize. And the price of gold was nearly cut in half over the next few years. Following massive global QE, deflation remains the bigger risk. But now money is moving into gold as a general store of value in a time of heightened global tensions and economic risk. As I've said, gold is sold as a hedge against inflation, but it's really a hedge against the worst-case scenario.
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August 2, 2019 We've discussed for some time, the idea that Trump has used his position of strength in trade negotiations with China to wield influence over the Fed.
He's badgered the Fed for a rate cut for more than a year. By driving a harder line on negotiations with China, he ultimately soured business confidence to the point that the Fed was forced into a “defensive” cut. With that in mind, yesterday I thought we should expect Trump, with a rate cut now under his belt, to get a deal done with China. As we know, trade talks were restarted this week, starting a timeline that would get the ball rolling on a deal coming out of the expected rate cut. But China seems to be extending the timeline, pushing off further meetings until September. With that, today, instead of an announcement that a trade deal is getting close, Trump came with even more aggressive posturing – a threat to ramp UP tariffs beginning September 1. The market took this as a message that a deal was nowhere near a consummation. I think we have Trump turning UP the heat to get a deal done — sooner, rather than later. The September 1 deadline would target getting China back to the table sooner, and a trade deal this month! Trump has had the upper hand in these negotiations (working with the backdrop of strong economy, relative to a weakening Chinese economy). But as we get closer to the 2020 elections, China finds itself with building leverage. My view: The worst case-scenario for Trump is China turning its back altogether on a deal. That would likely spiral global financial markets, global confidence, and the global economy. And that would be a deadly recipe for the prospects of a second term for Trump. Regardless of your political views, that's a scenario no one should want. The erosion in global confidence would overwhelm (global) fiscal stimulus and monetary stimulus, leaving both with no ammunition into what would likely be a global depression (as we were flirting with in mid-2016), not recession. Alternatively, if Trump does a deal (any deal), into a solid economy, with global central banks in an easing direction, global markets and economies will boom. That gets Trump re-elected. If he wants to press China on more demands, he can do it in the second term. If you haven't signed up for my Billionaire's Portfolio, join now — get your risk free access here.
July 31, 2019 We got the quarter point cut by the Fed today. For those that have been looking for more, they also ended their balance sheet run-off two months early. This means the bonds that mature, they will be reinvesting the proceeds (i.e. buying bonds — that halts the tightening of money via the Fed balance sheet).
Remember, as we've discussed, the direction is more important than the magnitude at this point. The Fed has just done an about face, from a tightening cycle, to easing. The direction is now facing south, instead of north. And it was the indiscriminate (tone-deaf) mechanical tightening by the Fed that represented a big risk in markets. Not only did it appear that the Fed might continue plodding along a pre-determined rate hiking path, at the expense of the economic recovery, but that monetary policy direction was sucking capital out of the emerging market world, and into the U.S. (dollar and dollar-denominated assets). With that, the biggest winners in this direction change by the Fed should be foreign currencies and emerging market stocks (and economies). Trump now has his rate cut. I suspect we'll see him 'claim a victory' on China negotiations (i.e. make a deal) very soon. That puts global central banks in an easing direction, as the weight of a global trade war gets lifted. Global markets and economies will boom. If you haven't signed up for my Billionaire's Portfolio, join now — get your risk free access here.
July 30, 2019 With tomorrow's big Fed decision looming, we heard from the Bank of Japan overnight.
As the ECB did last week, the BOJ held the line on current policy, but stepped up the rhetoric on doing more.
But as I've said, I suspect neither (the ECB nor the BOJ) will have to execute on the "doing more" rhetoric.
Why? A direction change from the Fed tomorrow (moving from tightening to easing) will likely be enough to turn the tide of global sentiment. If a U.S./China trade deal follows, the next moves by the ECB and BOJ will be exiting emergency level policy, not plowing deeper into it.
We will enter the Fed tomorrow with the 10-year yield hovering just above 2%. That means banks are paying an annualized rate of about 50 basis points more to borrow money overnight (between banks) than the government is paying to borrow money for 10 years.
For perspective, in October of last year, the 10-year yield was 3.25% (125 basis points higher). Two months later, the Fed hiked one last time — and the global financial markets clearly signaled that it was a mistake. Stocks plunged. Yields plunged.
Immediately following the December move by the Fed, we started looking at the similarities between 1994-1995 and 2018-2019. And that script has played out perfectly.
Remember, last year (2018) was the first year since 1994 that cash was the best producing major asset class (among stocks, real estate, bonds, gold). And the culprit (in both 1994 and 2018) was an overly aggressive Fed tightening cycle in a low inflation recovering economy.
The Fed ended up cutting rates in July of 1995 and spurring a huge run up in stocks (up 36%). Here we are in July of 2019, and the Fed, again, is set to reverse course on rates. We enter tomorrow's Fed meeting with stocks already up 20%. If you haven't signed up for my Billionaire's Portfolio, join now — get your risk free access here.
July 28, 2019 With the big Fed meeting this week, there continues to be some debate about whether they will cut by 25 basis points or 50.
But the direction matters more than the magnitude.
It signals the end of the Fed’s “policy damage” to emerging markets.
Higher U.S. rates have meant a stronger dollar. And with the economy moving north, the dollar moving north and rates moving north, global capital has moved toward the U.S. — and away from riskier emerging markets.
It's not that the U.S. economy can't handle a 2.5% Fed Funds rate, it's that the EM world can't handle it (in the current post-financial crisis economic environment).
As the Dallas Fed put it last year: “Emerging economies have suffered a general decline in forecast GDP growth … The tightening of monetary policy in advanced economies, both through rate hikes and other policy actions such as forward guidance, results in capital outflows from emerging economies with low reserves relative to their foreign debt.”
This official direction change from the Fed should weaken the dollar. Moreover, a key piece in the continuation of the global economic recovery will likely be a weaker dollar.
It will drive a more balanced U.S. and global economy, and it will reflect strength in emerging markets (i.e. capital flows to emerging markets).
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July 26, 2019 We've talked about the set up for a positive surprise coming into this morning's first reading on Q2 GDP.
We did, indeed, get a positive surprise. The economy grew at 2.1% pace in the second quarter. That's better than the Wall Street estimate (1.8%), and a lot better than the Atlanta Fed's estimate of 1.3%. As we've discussed over the past two weeks, the first half of Q2 earnings season has been better than expected, because of a strong consumer. With that, it was a safe bet that we would see the strong consumer show up in GDP this morning. Consumer spending was up 4% in the quarter. Domestic demand grew by 3.5%. Things are pretty good. |
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This leaves some people wondering if the Fed's case for rate cuts has been damaged.
The answer is no. While consumer confidence has been stabilized and underpinned by central bank rhetoric, business confidence has been a different story. And this is something the Fed has been emphasizing. Business fixed investment declined (in Q2) for the first time in three years. This is clear concern about an indefinite trade war — and monetary policy that is too tight, relative to the rest of the world, if trade protectionism were to spread and amplify. That's where the Fed has plenty of jusitification to make their move next week. If you haven't signed up for my Billionaire's Portfolio, join now — get your risk free access here.
July 25, 2019 We heard from the ECB this morning. Draghi was expected to step up his "ready to act" rhetoric, but was unlikely to do anything. That was the case.
As we discussed yesterday, an official change in policy direction by the Fed next week (cutting rates, a three year rate hiking campaign), should be enough to ease the pressure on the global economy, without requiring a move by the ECB and more stimulus from the BOJ. Let's talk about earnings and tomorrow's GDP report. The theme of the year has been concern about the slowing economy. While it hasn't reflected much in the data, the fear has been driven by the prospects of eroding global confidence. The first place that tends to show up is in financial markets. We saw it late last year, as U.S. and global stocks plunged. But if we look at how the consumer has done through the first half of 2019, there are no signs of a loss of confidence. The consumer discretionary sector is up 25% year-to-date, outperforming the broader market (which is up 20%). Earnings have continued to beat expectations in consumer related businesses. We saw it early in the earnings seasons in Q1 and Q2, from the performance of the consumer businesses within the big banks. Today, Starbucks gave us another barometer on the consumer (a beat on earnings, with 26% year-over-year earnings growth). Expedia, the online travel booking site beat on earnings, with 9% growth in booking revenue from the same period a year ago. Why has the consumer held in strong this year, in the face of a confidence shock to end 2018? The Fed (and global central banks) answered the call. The did what they've done for the past decade — promising to do whatever it takes to keep the economy moving forward, and to avert any economic shocks. That's enough to keep people spending and investing. But a trade deal will be needed (soon) to keep it going.
We get the first look at Q2 GDP tomorrow morning. The Atlanta Fed model is looking for just 1.3% growth in the quarter. With consumption contributing 70% of that reading, this GDP number looks setup for a positive surprise.
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July 24, 2019 Over the next five business days we'll hear from the European Central Bank, the Bank of Japan and the Fed.
The ECB will kick it off tomorrow morning. And we head into this major central bank meeting with U.S. stocks sitting on new record highs. And with German bond yields trading very near record lows (at negative 37 basis points). We already know all three of these major central banks have made it clear over the past seven months that they will do more easing, more unconventional policies if needed. The question is, will the ECB, just seven months removed from ending its QE program, announce a new stimulative program? Will the BOJ add to its QE program? Doubtful. I suspect, a reversal of course by the Fed next week (from a three year rate hiking campaign, to cutting rates), will be enough to ease the pressure on the global economy, without more official action from the ECB and BOJ. Any pressure on the ECB and BOJ to do more would be further eased, if a U.S./China trade deal were to follow the Fed's move. The Trump administration appears to be putting the timeline in place. U.S./China trade negotiations will restart in China next Tuesday through Wednesday (the day we expect to get a Fed cut). And then the Treasury Secretary said today, they plan to have meetings come back to D.C. Remember, Trump is in the position of strength on the China negotiations. At anytime, he can make any concessions necessary to do a deal, and remove the overhang of uncertainty on the global economy. Heading into next year's election, he would have a tailwind of a booming economy. Now, with U.S. stocks sitting on record highs, let's take a look at a couple of stock market charts that should offer bigger opportunity over the next five months, following the global economic relief of a Fed pivot (rate cut). Here's a look at German stocks. The S&P 500 is on record highs, the DAX is 9% off of the record highs (from January of last year). |
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And here's a look at Japanese stocks. You can see the Nikkei looks like a technical breakout is coming (i.e. going higher). The S&P 500 is on record highs, and the Nikkei is 13% away from the October 2018 highs.
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