US-China Trade War Moving Beyond Boundaries
As expected, the relief from trade wars didn’t last long. Not a week after US President Trump and EU President Juncker announced an armistice on tariffs between the two dominant economies, the former revived pressure on its favorite target: China. Trump had issued threats of escalating tariffs against its trade-dependent counterpart over previous weeks, but the impact of the warning seemed to come with shorter half-lives than what we had experienced through previous iterations. With a strategy that seems to center upon keeping steady pressure on China, the administration seems to have adopted two new means of pushing its efforts. The first drive follows the familiar policy approach of escalating the stakes, just at a faster pace.
This past week, the President advised his trade officials to explore raising the tax rate on the previously threatened $200 billion in tariffs against China from the initially stated 10 percent to a far more onerous 25 percent. Following its vow to match the United States’ efforts in kind, China said it was looking into a further $60 billion tariff on US goods. This is notably smaller, which reflects the reality that the country is reaching the limits of this ‘conventional’ economic ordinance as China only imported $130 billion in US goods the previous year. That said, the escalation is unlikely to stop there. The targets and methods will evolve - and the US may have be ushering in the next stage of the trade war engagements.
Late last week, the President’s Chief Economic Adviser Larry Kudlow essentially took to trash talking the Chinese economy and financial system. In remarks he suggested data is suggesting the Chinese economy was slowing and suggested the slide in the Yuan may be evidence that capital was fleeing its financial system. Though seemingly modest compared to the political Molotov cocktails tossed so frequently nowadays, attempting to incite panic among a competitor’s investors is dangerous and diplomatically belligerent. Above all else, China is concerned with stability: economically, financially and socially. Threatening this calm is likely to provoke a more aggressive – and now unconventional – way. And, lest we forget how connected the world is today, if a crisis erupts for either economy, it will spread to the other – and the rest of the world.
The Next Major Leg of a Broader Dollar Trend?
There has been a notable increase in forecasts projecting the forthcoming next leg of a larger dollar bull trend. That is certainly possible, but given the larger themes guiding the benchmark currency, it is far less probable than ensuing slide. I approach evaluating any currency or market with the belief that it can ultimately rise or fall. To assume certainty in a directional view is to delude yourself and make you less capable of adapting on the fly – cutting losses or taking advantage of the unexpected – when circumstances don’t go to plan. For the Greenback, I can certainly think of conditions that would foster further advance. That said, they are less likely to occur, less capable of sustaining influence or more likely to be overpowered by more commanding influences.
The most favorable alignment would come through the combination of the Fed maintaining its hawkish bearing, risk trends holding buoyant (favoring its yield forecast), major counterpart currencies torpedoed by their own troubles and trade wars somehow encouraging capital to flow into the economy. That said, these are broadly unlikely conditions. Growth forecasts are starting to fade and volatility is materializing in the financial system more frequently. That undermines conviction in the ‘risk on’ bearing and the Fed’s divergent monetary policy bearing is likely to capsize in turbulent market conditions. Trade wars render no winners whether initiator or target, and the United States’ indiscriminate pressure on so many major trade patterns dramatically increases the risk of painful blow-back.
The most promising fundamental spark moving forward would the broad collapse of the Dollar’s major counterparts. That is possible in systemic risk aversion where the market takes time to evaluate the eroded capacity of central banks to fight fires through diminished monetary policy. However, fleeing to the US for safety amid trade wars is a particularly thin fundamental scenario. Yes, it is possible that the DXY overtakes 96 and EURUSD slips 1.1500 to reconstitute the reversal in April and May. However probabilities don’t favor that outcome.
Apple Passes $1 Trillion Valuation and Calls Attention to Where Value is Being Assigned
Investor sentiment has proven impervious to various fundamental and speculative hits over the past years. This strength has been formed through a mix of genuine economic recovery, exceptional monetary policy and raw speculative appetite. Yet, over time – and speculative reach – we have seen some of these pillars of support fall away. Economic growth has leveled out and is now at risk owing to populist pressures and extreme accommodation at central banks has plateaued. This leaves investor appetite itself an anchor of enthusiasm. And so, the focus turns to the correlation between assets along the lines of investor sentiment with leading exemplars of speculation carrying much of the market’s weight. As far as ideals for risk trends, there are few more concentrated reflections than the FAANG group.
Registering out-performance across liquid, global asset classes; US equities have registered one of the strongest runs since 2008. Within US stocks, the tech sector has proven a leader. And, further at the core of that sector are the market cap dominant members comprising the FANG. The previous week we notched the split between relative impressive reports by Google and Amazon compared to the objective pain suffered by Facebook and Netflix. That left the unofficial ‘A’ (Apple) to break the tie. And, break the tie it would with a robust earnings that catapulted shares to a record high and beyond the historic milestone that marked this firm as the first publicly-traded company to surpass a $1 trillion valuation marker. This is a significant milestone in financial history, however, it will not alter the course of our immediate future. There was a time in past market cycles where surpassing a major ‘psychological’ level – like 10,000 for the Dow Jones Industrial Average – was treated as a turning point whereby markets would seemingly never sink below the same baselines ever again. Of course, looking back, that seems ludicrous to suggest; but it is easy for market participants to be swept up in the mania just as completely as it does with panic.
Beyond the headlines, Apple’s performance was impressive but it didn’t produce a particularly extreme charge to reach this new milestone. Further, its ability to carry broader sentiment to a further bull trend has already proven lacking. Ultimately, Apple’s performance serves to remind us how extraordinarily rich markets currently are and the shift in dependency from traditional (‘tangible’) value to more speculative means. I asked in a poll this past week what would be worse: if Apple earnings missed and its shares sank or if they beat and markets sank anyways. Clearly AAPL and markets at large advanced, but if it were to turn lower this coming week, it would carry the same sentiment as the latter scenario. And that scenario is the one I am more worried about.