FINSUM

FINSUM

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Tuesday, 26 June 2018 08:26

The Dow’s Drop Was Just the Beginning

(New York)

The Dow had a very ugly day yesterday, as did the Nasdaq and S&P 500. However, that might just be the beginning, argues Barron’s. Markets plunged as Trump escalated the trade stand-off with China and other US trading partners, including limiting Chinese investment in American technology companies. And while markets have been looking at a possible trade war for months, it seems as though they have not fully priced in one of the magnitude which now looks to be emerging. According to one analyst, “Markets are starting to price in the possibility of a trade war with China, however, I would argue that a true trade war–one that drives us into a worldwide recession–would lead to a 20% or more drop in prices, so we haven’t priced one in yet”.


FINSUM: This is a very ugly, but realistic, prediction. We are increasingly worried about the direction of the international dispute on trade.

Tuesday, 26 June 2018 08:25

Where Oil is Headed After OPEC Hike

(Houston)

OPEC is going to raise output by 1m barrels per day in a Saudi-led decision. But what will that mean for prices and oil-related companies? One might assume that higher output would be bad for prices, but in this instance, likely not. The reason why is that the high output is offsetting lost production from OPEC members like Venezuela and Iran. Libya is also experiencing lower production. All told, the three countries may combine for a 1.5mbd to 2.3mbd drop by the end of the year.


FINSUM: This hike is really just a partial offset to a much larger decline that is going on. It seems like it would be wise to stay bullish on prices.

Monday, 25 June 2018 09:07

Morgan Stanley Says Yields Have Peaked

(New York)

Many investors are worried about rising yields, which could wreak havoc on everything from the economy, to income stocks, to all manner of bonds. Well, for what it is worth, Morgan Stanley has just put out a piece arguing that the 3.12% yield seen on the ten-year Treasury recently is it, the peak. Morgan Stanley says that yields will stop rising and they are advising clients to go long Treasury bonds at current yields. The argument stands in contrast to Pimco and JP Morgan, who both see yields moving towards 4%. The one caveat to the call is if trade tensions get settled quickly, as turmoil on that front is one of the bullish drivers they see for Treasuries.


FINSUM: If trade tensions keep flaring we agree that Treasury yields are likely to stay flat or fall as investors flee to safety.

(New York)

As if there were not enough worrying indicators out there, Market Watch has featured a new worrisome measure. The paper interviewed a famous Wall Street quant who says that algorithms which track broad social media sentiment are showing significant risks of a serious decline in equities. The big worries on the public’s mind revolve around the escalating trade war between China and the US. The indicator also informs sector picks, to which strategist Yin Luo said “With U.S. stocks, we are bullish consumer discretionary, technology, and industrials over the medium horizon, and are negative on consumer staples and telecom services, where fundamentals remain relatively weak and momentum has been negative”.


FINSUM: We are always skeptical of these kinds of views because what people say on social media is not a very good reflection of what they are doing in their investment account. Further, there are likely mountains of people being assessed by the algorithms that have no trading/investment account, so their impact is nearly non existent.

(Washington)

The trade war between the US and China is intensifying. Investors will already be aware of the tit-for-tat $50 bn tariff packages the US and China have placed on each other, as well as Trump’s plan for a further $200 bn to be applied. However, the news is that Trump is now also preparing a comprehensive package of blockages to Chinese direct investment into the US. The amount of Chinese overseas investment flowing into the US has already plummeted to $1.8 bn in the first half of 2018, down from nearly $50 in 2016.


FINSUM: This trade spat just keeps escalating. The big risk is if China decides to sell US Treasuries and agency bonds as a payback, but we think that is still a few steps away.

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