August has gotten off to a poor start for the stock market as I’m sure your 401K could tell you. Major stock sell offs, spiking gold prices, and a rush to Bonds has all resulted from the collective realization that this trade war could have some major consequences globally, and not just for the 2 participants.
It all started when U.S. President, Donald Trump announced via Twitter that he would be putting new tariffs on the remaining $300 billion worth of goods that come from China over the weekend. China, who has been slow to act aggressively so far, stuck to its strategy of retaliatory aggression by allowing the Yuan to drop in value from its normal level of 6.5-6.9 Yuan per USD to 7. While on the surface it doesn’t seem to make sense for China to intentionally lower its currency’s value, it adds up when you realize that it makes buying Chinese goods a lot cheaper (and more attractive). In response, the US Treasury Department officially labeled China a currency manipulator, a serious move that has implications at the next IMF (international Monetary Fund) meetings. This was done because Trump put a tax on top of the cost of goods coming from China, so China essentially discounted their currency to compensate the buyers. This is odd because up to this point it has been China’s manipulation of its currency that has prevented it from reaching the 7 mark long ago through methods like printing money on demand (a method democratic representative Alexandria Ocasio Cortez suggested in her Green New Deal). So apparently the US is only upset when China manipulates its currency in direct response to US trade actions.
The currency dip was seen by many in the market as a serious escalation in the trade war and the markets sure did reflect it on Monday’s opening bell. Markets plummeted as much as 3% in the opening hour and had little recovery by end of day. This drop caused the investing safe havens of gold and bonds to move towards over-crowded after already being popular from the risk brought on by slowing growth and a prolonged trade war.
By Tuesday, China had felt its message was delivered effectively and restarted efforts to keep the Yuan below 7 once again. Just when things looked salvageable, APAC (AsiaPacific) nations, following the US Fed’s lead, cut interest rates. India continued its rate cutting streak, Thailand cut 25 basis points (.25%), and New Zealand really shocked with a 50 basis point cut or half a percent. While the numbers seem small, they have a massive impact on markets because rates are already hovering in the single digits and investors are taking cuts much more seriously in these turbulent times. The reason investors take these actions so seriously is the same reason rates are cut in the first place. Generally central banks like the US Federal Reserve will cut interest rates when growth begins to slow because it lowers the cost of borrowing money in virtually every way. Investors view this kind of like when you think you’re lost as a kid. You think its time to panic but you don’t fully commit until you see your parents start to and then all hope is lost. When the fed lowers interest rates, investors feel confident in their fears and make moves to safe havens like bonds and gold.
And boy did they ever make some moves. By end of day Tuesday, yields on the 10 year treasury note (used as a benchmark for mortgage rates and auto loans) sunk to as low as 1.595%. Gold prices shot up to $1500/troy ounce which is another multi-year record broken. These two signals are generally not good because it means investors don’t trust the stock market to keep going up but it is important to remember that most investors are actually pretty bad at predicting the market. They seem to have reacted a little quickly as China has backed off its currency moves, bond yields gained back 1% in a day, and major indexes (Dow Jones Industrial, S&P 500, NASDAQ) made up most of their losses.
So we seem intent on pushing through the storm winds to continue the longest Bull market in history but for how long? One thing we can’t deny is that the market has a new face that seems to be here to stay for a while, volatility. With more and more analysts predicting an approaching recession, trade war talks gaining no ground, and rates approaching negative yields volatility is here to stay.
