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Market Comment July 2018
Trade tensions are expected to weigh on stocks, creating volatility and corrections, until the Fed pauses its rate hikes, Morgan Stanley chief equity strategist Michael Wilson said in a note. Wilson said he expects to see more "volatility with several 10 percent corrections in global equity markets at different points." Trade issues will be the catalyst in the near term and will be a negative influence because of concerns about their effect on earnings and the economy, he noted in his second-half outlook.

Stocks could get rocked, until the Fed stops raising rates

Stocks right now are hanging by a thread, boosted by a bonanza of corporate buying unrivaled in market history and held back by a burst in investor selling that also has set a new record. Both sides are motivated by fear, as corporations find little else to do with their $2.1 trillion in cash than buy back their own shares or make deals, while individual investors head to the sidelines amid fears that a global trade war could thwart the substantial momentum the U.S. economy has seen this year.

Corporate buybacks are the only thing keeping the stock market afloat

"Corporate cash is going to find a home, and it's either going to be in buybacks, dividends or M&A activity. What it's not going to be is in capex," said Art Hogan, chief market strategist at B. Riley FBR. "Individuals are looking at the turbulence we've seen this year that we had not seen last year. That creates its own sort of exit sign for investors who don't want to deal with that."

Corporate buybacks are the only thing keeping the stock market afloat

The list of negatives facing the $6.6 trillion stock market is growing. The economy is already showing signs of vulnerability to a U.S. trade war before new taxes are levied at the end of this week. Analysts and investors alike are struggling to keep up with the yuan’s descent, while there’s been little sign of heavy state intervention to stem the slump in either stocks or the currency. Concern is also growing over the health of the country’s massive property market.

China's Rebound Gone Within a Day With Even Biggest Stocks Crumbling - Bloomberg


A "full-on bear market" could be coming within months, a team from Citi wrote this week. Markets are currently in the third of their four phases, the bank says, with the fourth phase bringing a bear market and a possible recession. Money is still out there to be made, the analysts emphasise, placing recommendations on equities in the US, Korea, Taiwan, Russia and Brazil.

Citi warns we could be months away from a 'full-on global bear market' - Business Insider

And indeed:

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Prices rose at their highest clip since 2012 over the past year, the Labor Department reported Thursday. The 2.9 percent inflation for the twelve-month period ending in June is a sign of a growing economy, but it’s also a painful development for workers, whose tepid wage gains have failed to keep pace with the rising prices. The cost of food, shelter and gas have all risen significantly in the past year. Gas skyrocketed more than 24 percent, rent for a primary residence jumped 3.6 percent and meals at restaurants and cafeterias rose 2.8 percent. Prices have risen roughly at the same rate as wages, erasing any gains workers may have hoped to realize via bigger paychecks.

Inflation hits 6-year high, wiping out wage gains for the average American - The Washington Post



We always surmised that the Chinese would use the yuan as a tool in the trade war with the US, and that indeed seems what's going on:

A slump in the yuan deepened on Friday after the central bank weakened its daily reference rate for the currency by the most in two years. The People’s Bank of China weakened the fixing by 0.9 percent to 6.7671 per dollar. While the rate was in line with the average forecast of traders and analysts in a Bloomberg survey, the yuan turned sharply lower after the move, sinking as much as 0.7 percent to 6.8367 per dollar in offshore trading before paring declines. Bets for further monetary easing and speculation the authorities are sanctioning the losses by not intervening have helped make the yuan the worst performer among more than 30 major currencies in the past month. The rapid descent has undermined confidence in other emerging market peers and helped fuel a plunge in commodity prices. "The Chinese authorities continue to refrain from active intervention," said Khoon Goh, Singapore-based head of Asia research at Australia & New Zealand Banking Group Ltd. "This suggests that they are allowing market forces to drive the currency and are not seeking to defend any particular levels. Markets will take this as a signal to continue to push the yuan weaker until there is firm signal from the authorities that they feel it has gone too far."

Yuan Nears `PBOC Put' Level That Could Help Markets, Nomura Says - Bloomberg

It isn't doing the Chinese stock market any favors though. And there are other explanations. They could simply be wary of how the PoB lost $1T in forex reserves in short order two years ago when actually trying to stem the decline of the yuan.


Rieder flagged the potential for a stronger dollar as a potential setback for liquidity and calm in emerging markets, because it's the world's reserve currency and the primary way debt is funded. The dollar's rise this year, following its worst since 2003, is already weighing on emerging-market assets, according to Erin Browne, the head of asset allocation at UBS Asset Management. "What's interesting about that is if you look at the correlation of EM equities relative to the US dollar, it's very highly correlated, which is telling you that the move that we see in EM assets right now is largely being driven by the dollar," Browne said at a media roundtable on Friday. EM equities fell 17.7% from their peak in early February to late-June, worse than the 14% drop during the taper tantrum of 2013, Browne said.

Markets have canaries in coal mine and risk more volatility, Rieder says - Business Insider

In fact, after almost every major negative tariff-related news in the recent past, the market has fallen, but then reversed itself, and sometimes sharply. In each case, “buying the news” made sense. That is the lesson the stock market is learning from Donald Trump. The market is being trained to buy the initial negative reaction to tariff-related news. Although Donald Trump himself may be very unpredictable, the stock market considers the tariff battle to be a provider of rather predictable opportunity instead.

Trump has trained stock market investors - MarketWatch

President Donald Trump likes to tweet about stocks, approval ratings, and unfair trade practices, among other things. Economists at Bank of America Merrill Lynch believe Trump will continue to target China on trade until US stocks or his presidential approval rating begins to take a hit. They think China will respond to any additional tariffs from the US by staging a war of economic attrition.

Bank of America: Trump stocks tweets predict future of China trade war - Business Insider


But for investors worried that the trade war will worsen, Goldman had two recommendations: Buy shares of companies that earn most of their revenue in the US. Goldman's domestic-sales basket has outperformed the S&P 500 by 130 basis points since May. It includes Charter Communications, Target, CVS, and Wells Fargo, none of which have any non-US sales. Overwrite equities with S&P 500 calls expiring in December 2019, with a strike price of 2,900. These will outperform if the index rises by less than 9%, Kostin said.

GOLDMAN: How Trump's trade war affects stocks and what to invest in - Business Insider

A rapid rise in the dollar has hurt second-quarter financial results and some U.S. companies are warning that the pressure could persist in future quarters. The U.S. dollar has risen 2.5 percent so far this year .DXY against a basket major currencies with most of its gains coming in the second quarter. As a result companies are starting to reevaluate their currency hedging strategies. Here are some of the U.S. companies blaming the stronger greenback for weaker revenue or profits:

Factbox: Strong U.S. dollar hurts U.S. firms across multiple industries | Reuters



Here is why the bond market didn't freak out after the 4.1% Q2 GDP print:

There are a lot of idiosyncratic factors that juiced growth last quarter. One is that growth was relatively disappointing at the beginning of the year and was due for a rebound. Again, the numbers are noisy. But another major factor is that businesses freaking out about Trump’s trade war likely pulled forward some of their activity. That is, as Morgan Stanley chief U.S. economist Ellen Zentner puts it, they doomsday prepped” by stockpiling raw materials, intermediate goods and finished products before tariffs raised costs on all those things. Soybean exports surged, for example, as companies raced to beat retaliatory tariffs that went into effect this month. The jump in soybean exports alone probably added 0.6 percentage points to GDP growth in the second quarter, estimates Ian Shepherdson, chief economist at Pantheon Macroeconomics. We should expect a reversal later this year, as buyers run down their existing inventory rather than place new orders..

The economy’s great. That doesn’t mean Trumponomics is. - The Washington Post


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