Tarrified. Last week illuminated what markets fear in a ‘trade war’ scenario. Trade disputes translate to tangible risk for the global economy which is why volatility increases and safe haven assets receive a bid. Opening salvos followed by retaliation laced with speculation, media spin, walk backs, and conspiracy theories – all of which contribute to an uncertain landscape under which business and investment decisions must be made. The stock market washout on Monday was largely clawed back by week’s end with the S&P 500 losing less than 0.5%. U.S. treasury bonds, REITs, utilities, and gold all posted healthy gains on the week.

Market Anecdotes

  • What’s a washout? Monday saw S&P 500, Nikkei 225, STOXX 600, and CSI 300 with only 63 stocks combined finish the day up – less than 4% of over 1,600 stocks.
  • This most recent trade tit for tat saw 40% of the S&P 500 YTD gains disappear in six trading days. The chronology and key markers are: o U.S-Sino delegations met to prepare for upcoming September 1st negotiations. o New U.S tariff announcement of 10% on the remaining $300b of Chinese imports.  o China let yuan fall and then later acted to stabilize currency. o Chinese SOEs suspend purchases of all U.S. agricultural products. o U.S. designates China a ‘currency manipulator’. o A ban on specific Huawei products by all U.S. federal agencies. o POTUS indicates September 1st meetings may be cancelled.
  • China’s situation is arguably more tenuous than the U.S. which currency markets seem to be signaling. A generational slow domestic economy, nine straight weeks of Hong Kong protests, and the U.S. trade war are all contributing to China’s difficult position.
  • $14.95T (44%) of the $33.8T global aggregate bond market is in negative yield territory. Only US, UK, Canada, Australia and New Zealand offer positive rates inside of 10yrs.
  • Fed fund futures are currently sitting on an 85% probability of a 25bps cut on the September 18th meeting and only a 14% probability of a 50bps cut.
  • Fed balance sheet assets are $3.782T, down $680b since QT began in October 2017.
  • 90% of S&P 500 companies have reported. Beat rates (E/R) are 75% and 57% – both above average. Blended earnings and revenue growth rates are -0.7% and 4.1% respectively.
  • The yield curve has now been inverted for 13 days, currently at -0.26%.
  • EAI data show growth in non-OPEC supply is outstripping growth in global oil demand in ‘18, ‘19, and expected ‘20, unlike ‘15, ‘16, ‘17.
  • Iran seized another ship in the Strait of Hormuz and North Korea conducted short range missile tests in response to joint U.S.-South Korea military exercises.
  • Italian bond yields spiked last week as League leader Salvini called for a confidence vote and new elections.

Economic Release Highlights

  • July ISM Non-Manufacturing of 53.7 fell short of the bottom end estimate and is at a three-year low.  Regardless, the reading remains in moderate growth territory well above 50.
  • June JOLTS report continued this year’s theme of moderation in labor demand with both hires and openings moving slightly lower while quits were relatively flat.
  • U.K. GDP contracted for the first time since 2012 (-0.20%).
  • Japan’s GDP expanded a third straight quarter with 2.8% YoY growth.  Robust private consumption and solid business investment were clear while a decline in exports (China) detracted.
  • Global service PMIs improved MoM for July in both emerging and developed countries but are still lower versus one year ago.  The global composite registered 51.4 with the U.S. remaining relatively strong at 52.6.