Eq: Total Market
If you are feeling some relief because of the “trade truce” between the US and China, don’t. At least that is what Morgan Stanley and Bank of America are saying. Morgan Stanley explains that the current rally is very reminiscent of what happened last November, just before the market imploded and had the worst December on record. At that time, the US and China had another truce which sent markets rallying. However, bigger tensions loomed larger and set the market up for a historic fall. One of the big issues was that the seeming ”truce” stopped inventory managers from purchasing because there was no more incentive to stockpile.
FINSUM: The most interesting view here is the idea that the markets are trapped between the “Powell Put” and the “Trump Call”. That is the concept that every time markets are doing well, Trump will try to drive a harder bargain with China, and if the market falls, Powell will cut rates. In this way, markets could be trapped in a banded range.
America tends to be very US-centric, but right now it would be wise to pay attention to some global economic signals. In particular, manufacturing is starting to look very weak across the world, and the negative wave is already impacting the US. Factory output across Europe and Asia declined in June, and the US’ barely rose. Globally, it was a second straight month of contractions, something that has not happened since 2012. More specific data showed declining sales and production in both China and Germany.
FINSUM: The US has been sprayed with Teflon for most of this bull market, but given the global nature of the trade war, it seems like we may be starting to get sucked into the downturn.
In what comes as a troubling sign for the economy, but surely one good for the likelihood of a rate cut next month, new economic data shows that US manufacturing output slipped in June. The ISM manufacturing index slipped own into the territory between expansion and contraction. Perhaps more worrying than the absolute level is the fact that the index has been dropping for three straight months. However, many were expecting a worse drop, so this data was not as alarming as expected.
FINSUM: The fact that this was not as bad as expected is actually a very bearish sign, as it shows the current expectations of the market.
The market has the idea that the Fed holds a massive “put”. The concept entails that the Fed can effectively set a floor on asset prices because it can take dovish action to support markets at any point. However, that notion is problematic at the moment because a rate cut in the near term may actually induce a correction. In fact, markets look set for a lose-lose scenario. On the one hand, if the Fed does not cut rates, markets will be very disappointed and slump. On the other hand, investors have already priced in a near 100% chance of a rate hike, so it happening won’t give markets much of a boost and is more likely just to make investors worry that the economy is headed south.
FINSUM: We hate to say it, but we kind of buy into this view. Maybe not so much that markets will fall even if the Fed cuts rates, but the cuts certainly won’t be overly supportive at this point and may lead to a gradual decline.
Trump and Xi are meeting this weekend alongside the G20, and the encounter seems likely to pivotal in the trade war between the US and China. No one is expecting a whole lot, but there is some hope of a potentially positive new path. The more likely outcome, however, appears to be an escalation of the conflict. If that happens, with both sides raising tariffs and escalating rhetoric, a mild global recession over the next six quarters seems probably, says UBS. This would likely prompt global rate cutting by central banks.
FINSUM: This seems like a decent forecast. The irony is that because of their ability to stimulate, the US and Chinese markets will probably be hurt the least by this, as it will more likely be emerging markets that take a hit.
One of the biggest banks in the country has just offered a very bullish view. BAML says the US will avoid a recession. The comments come from the bank’s CEO, Brian Moynihan, who believes that growth will slow, but then flatten out and not go into a recession. “Everything we see in our customer base is consistent with a slowdown to 2% and a flattening out from there”, he says.
FINSUM: We found these comments to be genuinely interesting because BAML has a view on the economy that few do. Not only are they the largest consumer bank, but also the biggest mortgage lender. That means they can watch the pace of deposit growth and borrowing in a very direct way, and thus can take the economy’s pulse.