Quote of the Week
“Wake up to reality. This is an important juncture. The world’s geopolitical risks just ramped higher. Are you going to go blindly buy ‘stocks’ ahead of a slowing earnings season? I wouldn’t—and that’s why I’m not.” – CEO Keith McCullough, 9/16/2019, The Macro Show
Last week the markets were up again primarily due to supportive global central bank policies and optimism around the trade war situation possibly improving. China announced that it would exempt some U.S. products from tariffs, and the U.S. responded with delaying the increase in some of the tariffs scheduled to take effect next month.
Notable market moves last week included a sizable rise in Treasury yields and the outperformance of cyclical sectors such as financials, industrials, and energy over defensive sectors such as utilities, health care, and staples. These moves were in almost the exact opposite of where we are positioned. The rise in Treasury yields was especially harmful to our current position. With the economy slowing, and anticipated terrible earnings reports of U.S. corporations for the third quarter, (which will be reported in October/November) plus global growth slowing these trends should be reversing back to our benefit. Concerning global growth, China just reported its Industrial Production just hit a 17-year low.
We had a great month in August, and we have given back some of those gains in September. I still think we are well positioned, and the reality of the global and U.S. situation will be recognized over the next few months.
Wow, what a weekend. Oil prices spiked by nearly 20% Monday (this morning) before settling at a 9 percent increase as of the time of this writing (Monday 11 AM). The cause of the spike was the Houthi attack on two key Saudi oil installations on Saturday, which decreased Saudi oil output by 5.7 million barrels per day which is roughly half of Saudi Arabia’s normal daily output. The U.S. authorized the release of oil from the U.S. Strategic Petroleum Reserve on Sunday. Saudi Arabia and Russia downplayed the incident’s overall impact. The OPEC secretary general said there would be no need for an emergency meeting, and Russia’s energy minister told Interfax that urgent measures were not necessary because of the “fairly large amount of reserves in the world.” Saudi Arabia seems more worried about loss of market share than a prolonged disruption or a spike in demand that could outstrip supply.
The most important question is if and how the U.S. and Saudi Arabia will respond to the attack remains open. Mr. Trump, who has made American policy toward Iran markedly more hostile, tweeted on Sunday night that Washington was seeking Saudi input before a potential military response. “There is reason to believe that we know the culprit,” he wrote, saying that the military was “locked and loaded depending on verification.” This is a dangerous time and anything could happen and possibly spin out of control.
An interim U.S.-China deal? The Trump administration is reportedly mulling offering a limited, temporary trade agreement to Beijing. According to Bloomberg, the deal would delay new tariffs and even roll back some existing duties for the first time in exchange for Chinese pledges on intellectual property and agricultural purchases. Mr. Trump on Thursday of last week was non-committal, acknowledging the possibility of an interim deal but expressing a clear preference for something comprehensive. An unnamed senior White House official told CNBC that an interim deal was “absolutely not” on the table. Again, who knows what this White House will do day to day.
Regardless, both sides have ample interest in at least avoiding the mutual economic fallout that would come with further escalation. They are both making gestures to boost the chances of success in the upcoming talks. For example, China has reportedly ramped up orders for U.S. farm products.
China’s top trade negotiator, Vice Premier Liu He, said a working level meeting would take place next week to prepare for the October talks. According to Liu, the October talks will focus on “trade balance, market entry, and investor protection” where Beijing has some ability to concede on measures that it needs or wants to concede on anyway. This also means U.S. demands for structural reforms such as dramatic reduction in the state’s role in the Chinese economy are almost certainly still off the table.
The Trump administration would be forced to settle for a slimmed down trade deal that did little to address the underlying sources of U.S.-China trade tension. The “mini deal” that may be within reach this fall would amount to exactly that. Since most U.S. tariffs will remain in effect, talks will inevitably continue in fits and starts on an elusive grand bargain.
It doesn’t look like “trade wars” are easy to win after all.
By the Numbers
TREASURIES – The amount of outstanding Treasury debt issued by the USA has quadrupled since the end of 2004, rising from $3.95 trillion on 12/31/04 to $15.61 trillion as of 6/30/19 (source: SIFMA). Michael A. Higley, BTN 09-16-2019
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These are the opinions of Larry Lof and Stephanie Mayoral and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs.
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