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Macro

(Washington)

The Chinese stock market is now in a bear market and there is a great deal of pressure on its currency. Last time there was this much pressure, in 2015, the market broke, with stocks plunging and the yuan devaluing by 7% over the year. US stocks even plunged in fear. Now, the situation looks like it might occur again, causing some to call the yuan the next “big short”. The currency is already down almost 1% since Friday, and is in negative territory for the year. A burgeoning trade war with the US is adding pressure.


FINSUM: So the one big support for the yuan is the current strength of the Chinese housing market, which has been strong recently (a big contrast to 2015). That seems like it will keep a blow out from happening.

(New York)

Investors beware, the strongest predictor of recession has just rung its bell. An inverted yield curve has predicted all six of the US recessions going back 60 years. And while all of investors’ focus has been on whether the Treasury yield curve will invert, the global yield curve already has. The yield on the ICE Bank of America index of government bonds due in 7 to 10 years has already inverted, with such yields being lower than for 1 to 3 year bonds. While the US economy is currently looking strong, there is growing weakness in Europe, China, and emerging markets, which seems to have inverted the curve. The IMF says the clouds over the world’s economy are “getting darker by the day”.


FINSUM: It is seeming more and more like we will have a global recession. Though, the US seems like it will be the last to succumb to it. One thing to remember—in the US it takes an average of 18.5 months from when the curve inverts to when we reach the peak of the growth cycle.

(Beijing)

With the US-led tariffs battle in full swing, Americans tend to focus on how such tariffs are affecting our own country. However, to understand how things may play out, we need to see what is happening on the other side. While US markets have taken a shallow hit from the potential trade war, Chinese shares are plummeting, and a very near to a bear market. Both the country’s Shanghai and Shenzhen indexes are at almost a 19% loss from their peak in January, just a hair off the 20% loss that qualifies as a bear market. According to one Chinese securities analyst, “It’s mainly the trade war that has created such panic in the market because the latest developments have surpassed the expectations of many people in China”.


FINSUM: We wonder how much this kind of market pressure will compel the Chinese government to give in to some of the US’ demands? The counter point to that view is that since the country is not a democracy, the government doesn’t really have to worry all that much if people are upset. That is a very blunt view of the situation, but one we think is fundamentally true.

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