- Trade policy update. After being hit to the tune of ~$240 million by U.S. tariffs, India ratcheted up tensions overnight when it retaliated with tariffs of its own on a wide range of U.S. imports, while European automaker Daimler blamed protectionist trade policies for its profit warning. Meanwhile, China is digging in with strong rhetoric and internal stimulus preparations to support its economy to mitigate any potential impact to small businesses. The tensions will likely go up another notch or two because the Trump administration expects to win this battle, but that means market volatility around trade uncertainty will likely persist. Nonetheless, we believe overall strong economic and corporate fundamentals will win out in the end.
If all you saw were the headlines you might think that “trade wars” or “a flattening yield curve” was pushing equities to the brink of a new bear market as the U.S. economy teetered on recession. However, the data suggest the U.S. economy remains strong and the S&P 500 Index is sitting comfortably in positive territory year to date, having jumped nearly 5% since the start of the “sell in May and go away” period.
“With today being the first official day of summer, can this surprise summer rally continue?” Continue reading
Three of the world’s most influential central banks met last week—the Federal Reserve (Fed), the European Central Bank (ECB), and the Bank of Japan (BOJ)—during an action-packed five days that also included several important economic data updates. Continue reading
- Tariff headlines versus implementation. While trade headlines have garnered a lot of attention, and roiled markets in some instances, it’s important to reiterate that neither side wants a trade war. The tit-for-tat we’ve seen over the past few months may be more aptly viewed as the U.S. and China feeling each other out to better understand the other’s pain points as they (hopefully) progress towards a more mutually beneficial relationship as major trading partners. Looking back at some of the recent back-and-forth may help put the most recent $200 billion announcement into perspective. But first it’s important to remember that there’s typically ~60 days from the announcement to imposition of the tariffs, intentionally leaving time for reaction, negotiation, and adjustment. In March, it started with import taxes on steel and aluminum, with no stated target value, before targeting sanctions on one of China’s largest telecom firms on national security grounds; then Treasury Secretary Mnuchin announced the “trade war” was on hold late last month as negotiations continued and China agreed to buy “significantly more” from the U.S. Importantly, these jabs are not intended to be knock-out punches, and though the dollar value of the latest announcement is higher than previous iterations, it’s still small relative to the size of the economies in question.
Capital expenditures help increase productivity, and improved productivity is the foundation upon which developed economies can sustain higher growth rates. Recent data, some of which we highlighted yesterday, continue to confirm that we might be seeing a rebound in capex, but how can we know it’s sustainable? Continue reading
- U.S.-China update. While it is often said that no one wins in a trade war, in the off chance it escalates to that, the U.S. has a few important advantages. However, those advantages do not imply that the road to resolution will necessarily be easy, and China has a few bargaining chips of its own. We lay out several of each countries’ advantages below:
- Advantage U.S. Last year the U.S. exported $130 billion in goods to China, while China exported $505 billion in goods to the U.S. Consequently, China is going to run out of direct reprisals quickly should it look to match the U.S. in tariffs. There is also broad agreement globally that China engages in a range of unfair trade practices, which provides some moral high ground for the U.S. to demand concessions. President Trump’s base may have a fairly high pain tolerance if it believes in the president’s goals. Finally, President Trump’s trade stance makes threats credible that might be otherwise dismissed as unlikely, which solidifies his bargaining position.
- Advantage China. China’s president Xi doesn’t have to face reelection and U.S. mid-terms are around the corner, making the political pain of an extended trade dispute potentially higher in the U.S., and China is already targeting political pressure points. Also, China’s economic growth rate makes it a very attractive market for investment, and it could look to offset a drop in exports by limiting partnerships with U.S. companies. The tariffs are on China’s finished goods and are likely to have a ripple effect on U.S. allies like South Korea and Japan that supply many of the inputs, alleviating a source of potential added pressure on China. Last, while China is very unlikely to go with the “nuclear option” of dumping its large holding of Treasuries, tactical selling at politically opportune moments can provide added pressure points.
Capital spending is accelerating while several tailwinds are only just starting to kick in. Capital expenditures (capex) are being supported by several factors, including booming earnings, corporate tax cuts, immediate expensing of capital investments, repatriation of overseas cash, strong business confidence and deregulation. Continue reading
- Trade worries drive stocks lower. Nothing over the weekend was particularly surprising on the tariff front, though fears of further escalation preceded the S&P 500 Index opening more than half a percent lower this morning. Some were perhaps looking for a last-ditch effort to prevent tariffs on about $50 billion of Chinese imports from being implemented, which did not come to pass. Last week’s stock market calm–it was the narrowest week of trading all year–suggests market participants remain optimistic that a full-blown trade war will be averted. Nonetheless, another round or two of retaliation may be in store over the coming weeks, which could cause additional short-term market volatility. An immigration crisis in Germany that could threaten Angela Merkel’s coalition is not helping sentiment this morning either.
US: S&P 500 Index +0.0%, Dow -0.9%, Nasdaq +1.3%
Europe: STOXX Europe 600 +1.0%, German DAX +1.9%, France CAC 40 +1.0%, U.K. FTSE 100 +1.1%
Asia: Japan Nikkei +0.7%, China Shanghai Composite -1.5%, Korea KOSPI -1.9%
Global/Regional: MSCI ACWI +0.1% MSCI EM -0.9% MSCI EAFE +0.2%
Rates/Commodities: 10-Year Treasury yield -2 basis points to 2.92%, WTI crude oil -1.6%, COMEX gold -1.4%
Major U.S. indexes went their separate ways this week as the S&P 500 Index (flat), Nasdaq (rose), and Dow (fell) all reacted differently to a plethora of headline-generating events. Continue reading
- U.S. rolls out tariffs on Chinese goods. President Trump approved a list of more than 1,100 items expected to generate ~$50 billion in taxes on Chinese imports, with an additional $16 billion in goods still under review. Collection is slated to begin three weeks from today. In the U.S.’ defense, the President stated that the U.S. can “no longer tolerate losing our technology and intellectual property through unfair economic practices.” He further indicated that the current state of U.S.-China trade remains unfair and unsustainable, and the U.S. would impose additional tariffs if China retaliates with levies of its own. Global equity markets retreated overnight on the news, but despite the rekindling of trade tensions between two of the world’s largest economies, many remain skeptical (as we do) that tensions will escalate to an all-out trade war. Rather, as we’ve stated before, the value of the tariffs suggests this is another negotiating tactic, but the situation bears monitoring to be sure.