Tag Archives: Trade War

Economics, Stock Market

Stocks Dive, Trump Goes Berserk: It’s Not Sexy, but the Inverted Yield Curve has Never Been Wrong

Yields-Send-StockMarket-Down Trump with yield symbol and stock chart collage

Stocks decline a day after Trump gave the markets a jolt of optimism…

Truth is, no one knows why stocks bounce one day and collapse the next. Yesterday, the reduction in trade war tensions, due to the postponement of a tariff increase, was credited with the surge in market prices.

Today, all major indices are down around 3%, while the VIX, known as the “fear index” spiked 20% higher, and there are plenty of factors that may have set the sell-off in motion:

This time, it’s the inversion of the yield curve that is given the blame, primarily, for the Dow Jones Industrial Average being down, at the end of Wednesday’s session, over 800 points. Asleep yet?

Don’t worry, this won’t take long: 

The Mysterious Yield Curve, Deconstructed

When shorter dated bonds, bonds that “mature” sooner, have higher yields (pay a higher percentage in interest) than longer dated ones, that’s an inverted yield curve. Inverted, because, it is not “normal” to be paid more for taking less risk, that is to say, holding a bond for a shorter period of time. Also, it’s not logical. 

Unless, in theory, people are seeing the near term risk as higher than the long term one. Which, honestly, may or may not be accurate, but perception is all and all.

And this is not the first inversion lately. For several months, since March, the 3-month yield rose above the 10-year, then again in July and has remained so. However, today it’s the 2-year vs. the 10-year, and it is considered the “main” pair, and that’s what got the ball rolling down hill. 

Extremes are also a concern. For example, the 30-year Treasury yield dropped to it’s lowest rate ever at 2.05%.

And, to top it all off, the snowball begins to roll when the 2-year vs. 10-year curve inverts, particularly due to the history of what happens after this phenomena occurs. 

The R word. Yes, recession. Not sometimes. Always. At least so far. 

Not necessarily right away. The first inversion prior to the 2008 financial crisis was in December of 2005. However, according to the Fed Bank of Cleveland, a recession can generally be expected approximately one year after the yield curve inverts. 

Trump Goes Berserk. Blames Fed Chairman and the “Crazy” Curve!

Does this guy sound worried?

Germany and China Numbers and That Pesky Trade War that Tariff-man loves so much

Ok, that’s pretty much the bond story. Other factors weighing on stock prices? There’s that pesky trade war with China which, yesterday’s jubilation notwithstanding, is not over. Not by a long shot. 

Then, in came the news that Germany’s GDP contracted for the first time in ten years. What has been called the “Golden Decade” for the mighty Teutonic economy, the world’s 4th largest, is now officially at an end. 

This, again, ties back to the trade wars as Germany is an export driven economy and exports to the US and China, (who, as we know are locked in their battle over trade) primarily and mainly cars. Car sales, particularly in China, are very weak. In China the sales figure have gone down for the last 13 months. 

Also in China, industrial production, it was announced, in July of 2019 was weaker than for the same month in 2018. Still a positive number, mind you, at 4.8%, but the lowest growth percentage in 17 years. 

Other economic numbers for the Chinese economy, also announced today, were weak in many key segments. Retail sales were less than expected and unemployment is on the rise. All in all, a gloomy report for what has been the rising star on the world stage in terms of growth. 

Plenty of Triggers, not many Rainbows

So, if we are looking for reasons why people in the stock markets, generally, might be in the mood to sell, we can point to these factors, not to mention political dangers in Asia with the ongoing Hong Kong protests, and tension. 

Although sometimes people sell just to sell (often politely called “profit taking”) this appears to be something else. 

Also, while it is too early to say that any positive effect will arise in trade talks, with the US and China both feeling weaker and therefore more accommodating, that is, at least one possible silver lining. 

Another is that, for the first time in all recorded history of the bond market, the inversion might not lead to a recession, after all.

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Breaking News, Business, Economics

Trump Blinks: Stocks Bounce, Apple gets Reprieve…(for now)

12 days ago, Trump announced that the remaining $300 billion in Chinese goods headed for the US would receive a 10% tariff, in addition to the $250 billion in other products already tagged with a 25% levy.

The reaction by the markets and the Chinese government was both swift and negative. In a move that was credited ( or blamed depending on your perspective) to the People’s Bank of China, for all practical purposes equivalent to the US Federal Reserve, the yuan was “allowed” to drop below the 7 to 1 rate against the dollar. Hitting the lowest point relative to the US currency since 2008.

The announcement was made today by the administration that the 10% hike, tentatively scheduled for September 1st, would be delayed until December 15th for some of the items on the list that were to have the tariffs applied. Those rescheduled include many important products for the holiday gift-giving season, including consumer electronics, computers and products such as Apple’s iPhone.

Speaking to a group of reporters on an airport tarmac around noon on Tuesday, Trump seemed to acknowledge something he previously had not, that the tariffs, which he appears to love so much, would harm companies and consumers in the US:

“We’re doing this for the Christmas season,”…“Just in case some of the tariffs would have an impact on U.S. customers.”

Donald Trump, August 13, 2019

He then backtracked, apparently attempting to clarify that he still believed, erroneously, that only China would be affected negatively:

“But so far they’ve had virtually none,” he continued. “But just in case they might have an impact on people, what we’ve done is we’ve delayed it, so that they won’t be relevant to the Christmas shopping season.”

The tweet with the original announcement from August 1st:

Retreat and Regroup: The New Trump Strategy?

This move, which amounts to a one-hundred-and-eighty-degree shift from his previous actions as the aggressor and instigator in the trade war so far, was unexpected and, in many quarters, welcome.

Whether China will see this as a conciliatory move or as a clear sign of weakness, by a man known to bluff with threats and then back-track almost on a daily basis, remains to be seen.

Economic problems are looming both here in the US and in Asia, as analysts have begun to talk of a recession, and fears of the trade war fallout have, according to market commentators, weighed on the markets and significantly increased volatility. There is widespread Fear of a repeat of the swoon from December 2018 when the market dropped, capping off what turned out to be the worst performance in a decade, ending the year down over 6%.

For companies like Apple, of course, the delay at least until December 15th is welcome news and that was reflected in the market today, with Apple and Best Buy both rebounding, up around 5% and 8%, respectively.

As many have pointed out, when Tariff-Man imposes a levy on Chinese goods coming into the US, it is virtually everyone except China that pays.

First of all, the actual tax, which is what a tariff is, will be collected from US importers as the goods enter the country. The taxes are paid at that time directly to the US customs.

The impact on China is not positive, however, and the higher prices that inevitably result from the tariffs, when ultimately passed on to the US consumer, cause a decrease in sales volumes, thereby hurting the producers in China directly.

Basically, in a nutshell, as in all previous trade wars, in the end, everybody loses. This is why, in a previous post, we stated that Trump was joining a “circular firing squad” with no hope of a positive outcome.

Read more: Tariff-man Joins Circular Firing Squad

Since the impact on tariffs takes time to reach the US economy, it is right about now that the levies would create negative fallout for Tump, his campaign and his popularity (and lack thereof). Clearly, it is no coincidence that this retreat is happening now.

With a man in the White House that is known to vacillate, there is no easy way to ascertain if this retreat marks the beginning of a surrender phase for Trump. While the “it’s for Christmas” excuse can help him to save face in this moment, and seeing the stock market’s reaction is certain welcome for many, this war was Trump’s invention and it is unlikely that he will suddenly admit that he was in error for starting it in the first place.

The “American Carnage” that would have been seen in the economy and the stock market, had he gone through with his threats and even raised the 10% up to 25% is almost unfathomable, and we can all breathe a sigh of relief that, for now, an renewed escalation is somewhat less likely than it was yesterday.

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Breaking News, Business, Economics, Stock Market

Market Drops on Trade War Escalation: Dow Closes Down 767

photo collage / Lynxotic

Does over 925 points lost by the Dow Jones Industrial Average intraday qualify as a Market Crash? With the NASDAQ down over 4% and Bonds at record low yields, and the Chinese Yuan breaking the psychologically important 7 to 1 barrier against the dollar, it appears the Trade War is getting serious indeed. The Dow closed for the day down 767 points.

After Trump’s now infamous tweet, late last week, that set markets in the US tumbling, now, China’s immediate retaliation plans have been revealed, pushing the markets into a tailspin.

Lowering the currency exchange rate has the effect of countering the tariff by increasing the number of yuan generated by dollar denominated exports. Naturally there are more complex peripheral and ancillary effects that will be debated by economists until the end of time. The People’s Bank, for what it’s worth, claimed that the drop was “driven and determined” by market forces.<p>The yuan is now at its lowest point relative to the dollar since 2008.

The NASDAQ and tech stocks are now down for the sixth straight day. A man who at his inauguration spoke of “the end of American carnage”, and who touts his ability to conjure up stock market gains is now facing a serious problem, in addition to his legal and political woes.

Dow Drops 925 Intraday on Trump’s Tariffs and Yuan Devaluation

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Business, Economics, Stock Market

Dow Drops 925 Intraday on Trump’s Tariffs and Yuan Devaluation

photo montage / Lynxotic

Bonds Hit Record Low Yields in Wild Wall Street Action

The carrot is gone and the sticks are out. After Trump’s now infamous tweet late last week that set markets in the US tumbling, now, the other shoe is dropping as China’s retaliation plans are revealed.

After Trump announced an additional 10% tariff on $300 billion of China goods entering the US, to be levied starting September 1st, China has already implemented a response.

First, the People’s Bank of China, which is the equivalent of the US Fed, allowed the yuan to fall below the peg of 7 to the dollar that has stood as a psychological barrier and is considered an important level to maintain.

Lowering the currency exchange rate has the effect of countering the tariff by increasing the number of yuan generated by dollar denominated exports.

Naturally there are more complex peripheral and ancillary effects that will be debated by economists until the end of time.

The People’s Bank, for what it’s worth, claimed that the drop was “driven and determined” by market forces.

The yuan is now at its lowest point relative to the dollar since 2008.

A second form of retaliation that China appears likely to implement is the reduction of or an outright halt on purchase of US agricultural products.

An increase in the quantities of US agricultural products was one of the concessions negotiated during the recent talks with China during the G-20 summit.

Trump tweeted his displeasure at the lack of follow-through on this promise:

And seemed to imply that this lack of cooperation was possibly the trigger behind his sudden decision to announce the 10% increase in tariffs.

With the US States that comprise the bulk of the large farmers that would be most affected by this issue being the same States that helped Trump win a narrow victory in the Electoral College in 2016, this is a “counterpunch” that will likely not sit well with the current resident of the White House.

These small steps, partly perhaps only threats, partly already in effect, are but a tiny slice of possible retaliation by the Middle Kingdom.

Tariff-Man Joins Circular Firing Squad

Tariff-Man is learning, apparently very slowly, some of the many reasons that Trade Wars are famous for not having any winning countries, but rather, are just a “circular firing squad” which produces only losers.

A common boast throughout the Trump Administrations tenure has been that the stock market is at or near all time highs and that he himself is the sole reason it is. With his trade policies being widely blamed for dramatic market losses that boast may have to be taken out of his toolkit, at least for the foreseeable future.

If today’s responses from China, followed by the stock market reaction, are any indication of where we are headed, it looks to be a bumpy Fall with September and October being statistically dangerous months for the financial markets, in general .

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Business, Economics, Politics

Trump Topples Rally with Tariffs: Dow Drops Nearly 600 Intraday

10% on $300 Billion will Commence September 1st…

The DJIA was up more than 300 points when the announcement was made, then it ultimately ended the session down 280. The new tariffs are on the 300 billion in goods that have been, until this point, coming into the country without a toll. There are also 250 billion in Chinese goods that already have a 25% levy attached.

Recent trade negotiations in Shanghai concluded on Wednesday with little or no progress. Talks are scheduled to resume in September.

Speaking on July 30th, before reporters Trump speculated that China may be thinking of delaying a resolution until after the election in 2020, saying:

“They would just love if I got defeated so they could deal with somebody like Elizabeth Warren or Sleepy Joe Biden…. They’ll pray that Trump loses. And then they’ll make a deal with a stiff, somebody that doesn’t know what they’re doing like Obama and Biden, like all the presidents before.”

Donald J. Trump

Calling the tariff a “small additional levy” Trump also said in a series of tweets that China’s promise to buy large amounts of agricultural products from the US, was not kept.

While speaking to reporters this afternoon at the White House, he also threatened to lift the percentage to 25% and beyond, “But we are not looking to do that, necessarily”.

Products that will be included in this new batch of tariffed goods will be consumer electronics such as iPhones, toys and shoes, among other items.

There was some surprise noted, as the meetings and discussions in Shanghai appeared to end on a somewhat positive note, initially. Now, with this announcement, there is a sense of the talks having fallen short of any progress at all.

Fallout of the Trade War to Begin Hitting Home

Trump continues to claim that China will pay these levies, although studies have shown that the consumer in the US will ultimately pay through higher costs on all tariffed goods. The higher prices will also harm sellers in the US due to a reduced volume of sales.

While there is sill also a lot of “carrot” talk, how the negotiations can also take a turn for the better at any time, coming from both sides, it does not appear that there is much substance to be gleaned from these pronouncements.

Since the percentage of some of the products that will be affected, such as toys, include as high as 85% currently coming from China, these tariffs can have a substantial effect on the marketplace.

Also, possibly unintended beneficiaries to the trade war are neighboring countries such as Vietnam and Cambodia, that are already showing signs of increased activity due to the shifting of origin of manufacturing to those countries in order to avoid the levies.

Tariff-man is staying true to his self-given moniker and in September, as the next wave hits, it is yet to be seen what the economic effects will be, either in China or here in the US.

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Business, Observation

Trump Toys with Tariffs Again: to the Tune of $4B Aimed at Eurozone

Using Aircraft Subsidies as Pretense to Hit Autos, Cheese, Whisky and More…

Coming on the heels of a “surprise” temporary reduction in trade tensions with China, the list of affected goods in the tariff threat also includes 89 items, such as, olives, ham, coffee, wine, some seafood and metals.

Although the prospect of a new major front in the global trade war is one to be wary of, Trump is beginning to show his hand: in using threats and then trying to milk the negotiating phase, for a potential stock market boost which is then attributed to reductions in tension. Perfect example at hand is the one that boosted the markets yesterday after the meetings with President Xi Jinping around the G20 Summit in Osaka, Japan.

Never mind that, as we reported on May 23rd, it was obvious that he (and Xi) would use the date-certain G20 to claim a temporary “victory” and try and boost stature (and the Markets) with a removal (that could also be temporary) of the additional $350 billion, previously scheduled to be levied.

Read more:

Trade-War Toddler Triggers Market Meltdown
May 23th, 2019: In a possible set up for both to appear to “rescue” their respective countries from this toddler-made crisis, a potential meeting at the G20 Japan summit, set to begin on June 28th, has been mentioned by the Trump administration.

Next Phase? European Front to Trade War

In May, 2018, Donald “Trade wars are good” Trump’s 25% tariffs on European steel and 10% on aluminum took effect. The European response was to impose steel import limits.

Behind it all, purportedly, are the aircraft subsidies given to Boeing and Airbus, respectively. Each of the two massive aircraft manufacturers received subsidies in the USD billions, according to the WTO.

In Trump’s about-face at the G20, he stated that the China negotiations are “right back on track”, although this, along with the original escalation that was an obvious ploy, can change at any time again, in a Queens heartbeat. Details of any progress on the agreement for Beijing to initiate economic reforms demanded by the US administration are currently unknown.

While Trump’s obsession with the stock market may serve him now, with many US indices at or near all time highs, if and when a dip occurs, especially coming in the ramp up into the 2020 elections, his tune will have to change in a hurry.

If the market does take a dive, look for him to find a scapegoat, or god forbid, start a war, not just a trade war, in order to distract from the suddenly unfavorable reflection on him. Crowing about stock market levels has traditionally not been a Presidential habit, for good reason, as, factually, bear markets always follow bull markets, sooner or later. Right now, it’s just a question of when. Trade wars will be an obvious explanation for any significant downturn, and that will undoubtedly be like the chickens coming home to roost, at long last.

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Observation

Trade-War Toddler Triggers Market Meltdown

Dow Drops 700 as China Retaliation Begins

Similar to the business acumen and negotiating prowess he exhibited while losing more than any other U.S. citizen during his “glory days” as a real-estate mogul, Trump is going for broke in the China trade war. Trump lost over a billion dollars between 1985 and 1994, even while writing a book on how to be a genius negotiator.

The latest phase in the Trump trade war started with a typical tweet-storm last Sunday. On the following Tuesday (May 7th) China responded, in Dirty Harry fashion, saying “Don’t even think about it” and “We will not back down”.

China slaps back with $60 Billion in Tariffs on U.S. products to begin on June 1

The list of products is set to contain 5-25% tariffs on approximately five thousand items that will likely include textiles, chemicals, agricultural products and metals. In a hint that this is only the beginning China added that they “will never surrender”, apparently, just for good measure.

In characteristic fashion, Trump tweeted various random comments interlaced with threats and simplistic advice on how U.S. consumers can avoid being affected by the tariffs, claiming that his war is “very good for USA!”.

All from a President that “Doesn’t Know What a Tariff Is“

As reported in Esquire there’s a distinct possibility that Trump is out to lunch on trade theory (see billion dollars lost in his personal business deals above for a hint).

We will be taking in Tens of Billions of Dollars in Tariffs from China. Buyers of product can make it themselves in the USA (ideal), or buy it from non-Tariffed countries.

– Trump in recent tweet

While this may sound peachy, his own advisor was forced to clarify:

“Yes, I don’t disagree with that,” said Larry Kudlow, the head of the president’s National Economic Council, when Chris Wallace, host of “Fox News Sunday,” asked him, “It’s U.S. businesses and U.S. consumers who pay, correct?” Kudlow added, “Both sides will pay”

– Lawrence Kudlow, head of the president’s National Economic Council, from a Fox News interview

Possible brinksmanship on display as Trump and Xi Jinping plan potential meet at Japan Summit

In a possible set up for both to appear to “rescue” their respective countries from this toddler-made crisis, a potential meeting at the G20 Japan summit, set to begin on June 28th, has been mentioned by the Trump administration.

A deal could be announced during the summit, or even before. However, it is unlikely that this will be much more than jawboning, at least initially, and meant to save face and calm markets while the war, and the Tariffs continue. In the meantime, watch for a possible European entrance into the fray to be next.

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