(Washington)

Trump spooked currency and Treasury markets yesterday. Speaking in the context of the US’ trade tussle with China and others, Trump said he wasn’t thrilled with the Fed’s interest rate hikes. He said that in the trade battle with China, the Fed should be accommodative with its policy. Trump called Beijing a currency manipulator, and said the Euro was being manipulated also. Speaking on Trump’s comments and his new consistency in criticizing the Fed, one analyst said “This is now a serious headwind to the dollar”.

FINSUM: It is true that a constantly strengthening currency is difficult to deal with in a trade war, but that the same time, the Fed’s job is to look at US economic fundamentals. That said, how rate decisions would affect the economy via a trade war do seem like they would be within the Fed’s purview.

(San Francisco)

Talk about comments coming right from the source. Microsoft CEO Satya Nadella went on the record this week telling the market that tech companies should “expect” regulation. Nadella walked through current areas of tech and regulations, like facial recognition or GDPR, and explained their implications for the industry. He said that “As tech becomes more and more pervasive, I think for all of us in the tech industry we should expect—whether it’s on privacy or on cybersecurity or even ethics or AI—government and regulatory bodies to take interest in it”.

FINSUM: We think the writing is on the wall that tech is going to face some form of regulation, especially given that the Trump administration is rather hard on the sector. The question is when, not if.

(New York)

Anyone who pays attention to the bond markets will know that there has been an extraordinary run up in BBB rated bonds since the Financial Crisis. From just $700 bn worth of bonds in 2008, to a whopping $3 tn now. Using the metaphor that such bonds, which are just one rung above junk, are like the dead trees and limbs in the forest before a fire, Barron’s is predicting big problems. The trigger is likely to be the next recession, which would cause many BBB bonds to fall down into the junk category. This would spark mandatory selling by many funds, leading to sharp losses for investors. What’s worse, such bonds, at an average yield of 4.3%, are not compensating investors for this risk, as they have only a 60 bp spread to A rated bonds.

FINSUM: There are bound to be a lot of fallen angels and losses in the next economic downturn. As one analyst summed it up, “With all this dry tinder lying around, it wouldn’t take much to set off a raging fire”.

(New York)

The current rate environment has put investors in a pickle. How does one protect short-term income needs while also protecting against interest rate risk? One important factor is to remember is that one can balance short-term losses by holding bonds to maturity, so stringing together groups of short-term bonds can be a solid risk-mitigating, but yield-maximizing strategy. There are a number of funds to look at to make managing the situation easier. These include the Lord Abbott Short Duration Income Fund (LDLFX), Transamerica short-term bond (ITAAX), and the Nuveen Short Duration High Yield Municipal bond (NVHIX).

FINSUM: It is a difficult fixed income environment right now, with corporate bonds broadly in the red for the year. A well-crafted and balanced strategy is a must, and given that short-term bonds currently have strong yields and less interest rate risk, they seem like the best bet.

(New York)

The US real estate market is in a worrying period. New builds, home sales, and inventory have all been showing weak signs for the last few months, and it seems to portend the start of a reversal in the market after a long run higher. This week will see if the current downward trend holds, or whether the data was an aberration. New data this week will cover new and existing home sales, which the market will be watching closely for signs of a downturn.

FINSUM: Housing and building-related stocks have suffered this year on a worsening outlook. Our instinct is that housing has a hit a wall and may be at the start of a correction.