Markets have been on edge for weeks, and it appears with good reason. President Trump is reportedly putting the finishing touches on a major trade tariff package that is directed at China (to the tune of $50 bn). The focus of the tariffs are on metals. In response, China is planning its own set of tariffs on US agricultural exports, especially from Farm Belt states.
FINSUM: So the US is negotiating exemptions with top allies, but is starting a trade war with China a good idea? The politically difficult aspect for Trump is that China’s retaliation against US agricultural exports will hurt the states that helped elect the president.
Wall Street is getting nervous about the changes occurring in the White House. Over the last week, President Trump has lost or fired both Gary Cohn and Rex Tillerson, former Goldman Sachs COO and former Exxon CEO, respectively. Both Cohn and Tllerson were considered the business-friendly part of Trump’s White House who would look after corporate and investor interests. With them gone, investors are betting the odds of a trade war are getting more likely. One equity strategist summarized the situation, saying “We’ve gone a long time with a zero percent chance of a trade war, it’s now higher than that -- probably significantly higher than that … The internationalists have lost and the nationalists have won”.
FINSUM: We agree that a trade war is getting more likely. If it occurs, we think it will be poor for equities markets, but not necessarily terrible for the economy.
Market volatility is back in a big way. This has made investors nervous and has re-ignited interest in traditional safe havens such as bonds and gold. However, Goldman Sachs has just note put out a note saying those asset classes have evaporated as safe havens. “No safe havens -- and no assets or equity sectors -- have had a positive beta to the VIX recently, and few have had a positive beta to 10-year yields, leading to diversification desperation”, say Goldman Sachs strategists. Rates, which look to be heading higher, have been a major culprit in the decline of safe havens, as have changing strategies, such as at the Bank of Japan.
FINSUM: This is one of the main reasons the market might end up falling further than it otherwise would have. Since there is no easy place to put cash, the overall panic level may be higher in a situation of serious volatility.
When you think of gold’s role in a portfolio, most would immediately say it is for hedging against inflation. However, new research shows that gold is only a good hedge for inflation over very long periods, such as decades or centuries. In normal time horizons, say one to five years, it is a very weak hedge, and equities have performed much better. Now this is not to say gold cannot be a good asset class in its own right, just that its traditional role should be rethought.
FINSUM: If gold is really a poor inflation hedge, then investors and their advisors need to think very carefully about how they conceptualize it within their portfolios.
Make no mistake about it, the Fed minutes from last month’s meeting today are a big risk. Economic data is a big driver of the market right now, and nothing could be more important than the Fed’s attitude on rates. If the minutes show a very hawkish Fed, then expect some volatility as investors interpret the odds for more and faster rate hikes. If the notes are dovish, expect gains. The minutes may include the Fed’s views on how the tax cut will affect the economy, which is another x-factor.
FINSUM: The market seems have grown slightly less worried about higher rates over the last couple of weeks, which we were readily expecting. But this could still be a risky minutes release.
Investors need to be on red alert today, as this is the day markets have been waiting for. US inflation data for January comes out this morning, the piece of information which will either assuage or accelerate fears about pending Fed rate hikes and a possible recession. Not only will the data affect US markets, but if inflation accelerates, it will also impact other asset classes, such as the Dollar, and by extension, emerging markets.
FINSUM: If inflation is ahead of forecasts, or looks at all strong, it will likely panic markets. If it is weak, there may be a relief rally.