Category: Market Action

More sabre rattling in Trump’s trade war:

China signaled on Thursday that it might continue to weaken its currency, a move that threatens to again escalate the trade war with the United States.

China’s central bank set the midpoint of the renminbi’s daily trading range above 7 to the American dollar for the first time in more than a decade. Thursday’s move in effect tells financial markets that Beijing expects the renminbi to continue to weaken versus the dollar, perhaps well past the 7-to-the-dollar level.
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The move by the People’s Bank of China in itself will not change the economics of the Chinese-American trade relationship. China on Thursday set the currency’s midpoint at 7.0039 to the dollar, compared with the 6.9996 point it set on Wednesday. China tightly controls trading of its currency, with that midpoint determining the center of a narrow range in which the renminbi can strengthen or weaken during the day.

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Well, if Trump loses his trade war and tips the US into a recession, he’s got his excuse prepared:

Donald Trump lashed out at the U.S. central bank on Wednesday, accusing the Federal Reserve’s interest rate policy with holding back the economy from winning a trade war he is trying to wage with China.

In a series of tweets on Wednesday, U.S. President Donald Trump blamed the central bank for not initiating interest rate cuts that are “bigger and faster” for the current turmoil in financial markets.
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“Our problem is a Federal Reserve that is too proud to admit their mistake of acting too fast and tightening too much (and that I was right!). They must Cut Rates bigger and faster, and stop their ridiculous quantitative tightening NOW,” he said.

TXPR closed at 599.18, down 1.11% on the day. Volume was 2.63-million, second only to July 19 in the past 30 days.

CPD closed at 11.96, down 1.24% on the day. Volume of 267,654 was the highest of the past thirty days, edging out July 31‘s 258,950.

ZPR closed at 9.56, down 1.54% on the day. Volume of 242,011 was the highest of the past 30 days, trouncing July 18‘s volume of 177,940.

Five-year Canada yields were up 1bp to 1.23% today.

PerpetualDiscounts now yield 5.57%, equivalent to 7.24% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.33%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) remains at an amazing 390bp, the same as that reported July 31.

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Trump’s trade war heated up over the long weekend:

The trade war between the United States and China entered a more dangerous phase on Monday, as Beijing allowed its currency to weaken, Chinese enterprises stopped making new purchases of American farm goods and President Trump indicated he would look for ways to retaliate.

The escalation shook world markets on Monday, as nervous investors looked for safe places to park their money. Wall Street suffered its worst day of the year, with the S&P 500 closing down nearly 3 percent. Selling was especially heavy in the trade-sensitive technology, consumer discretionary and industrial sectors. Yields on United States Treasuries, which fall as prices rise, dropped as investors sought safety in government-backed bonds. Benchmark indexes in Asia and Europe also fell.

Mohamed A. El-Erian posted on Facebook:

With today’s move, the entire yield curve for government bonds in Germany closed at negative levels.

This will take the stock of negative-yielding bonds worldwide to some $15 trillion.

Given what has occurred since European markets closed, look for both to get worse tomorrow.

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One of those events was a declaration by the US Treasury:

Late Monday, the Treasury took the unusual step of labeling China a currency manipulator — the first time it has done so since 1994. In a statement, the Treasury said that Steven Mnuchin, the Treasury secretary, “will engage with the International Monetary Fund to eliminate the unfair competitive advantage created by China’s latest actions.”

The action is mostly symbolic, requiring the administration to consult with the International Monetary Fund to try to eliminate the unfair advantage the currency measures have given a country. But China is likely to view the label as a rebuke, further escalating pressures between the countries.

The move will finally fulfill Mr. Trump’s campaign pledge to designate China a currency manipulator. As a presidential candidate, Mr. Trump was sharply critical of China’s currency practices and promised to label China a manipulator if elected.

Until Monday, Mr. Trump’s Treasury had declined to apply the label to China in the five currency reports it issued since the president took office. Instead, it has said the United States has deep concerns about China’s intervention in its currency.

For all that, the effect on Canadian major markets was muted:

Canada’s main stock index fell on Tuesday, hurt by a slide in energy and financial sectors amid heightened trade tensions between the United States and China.

The Toronto Stock Exchange’s S&P/TSX Composite index was down 122.17 points, or 0.75 per cent, at 16,149.49.

TXPR closed at 605.92, down 0.62% on the day. Volume was 1.72-million, slightly above the median of the past thirty days.

CPD closed at 12.11, down 0.86% on the day. Volume of 66,608 was slightly above the median of the past thirty days.

ZPR closed at 9.71, down 1.32% on the day. Volume of 101,277 was near the median of the past 30 days.

Five-year Canada yields were down 8bp to 1.37% today.

The BoC has released a staff analytical note titled Relative Value of Government of Canada Bonds:

We identify factors that are important for explaining why similar Government of Canada (GoC) bonds can have different values. For bonds that are expensive, we find they have higher trading volume and higher rental income. These factors can make these bonds more expensive than similar bonds, by up to 5 bps. For the cheap bonds, we find that they tend to have longer tenors and times to maturity. These bonds are typically harder and costlier to trade. Market participants may therefore value them less. The importance of rental income for GoC bond values suggests that a cap on rental income could hinder the ability of these bonds to reach their market value. This could lead to misallocation of these bonds among the buyers and sellers who value them most.

Yup. That’s why you have to be very careful when backtesting long-short hedge strategies! The borrow rates on expensive bonds can kill you!

RBC Wealth Management released some survey results (emphasis from original):

High-income Canadians are optimistic they will meet their goals, yet find wealth management topics complicated
Of the 48% of respondents who are not as wealthy as they thought they would be, almost three quarters (73%) believe they will reach their financial goals before retirement. This optimism seems to be at odds with their confidence when it comes to aspects of wealth management topics, with the majority agreeing the following topics are challenging:

Knowing which information to trust (78%)
Staying on top of what’s happening in the financial markets (76%)
Using tax strategies to minimize taxes (71%)
Ensuring they don’t outlive their assets during retirement (70%)
Understanding the use of insurance in a financial plan (66%)

Interesting survey from the UK:

Concerns putting people off accessing impartial professional retirement planning advice

44% of people are put off by the perceived cost of advice
45% fear that the financial adviser would not act in their best interests.

The FOMC announcement came today:

Information received since the Federal Open Market Committee met in June indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although growth of household spending has picked up from earlier in the year, growth of business fixed investment has been soft. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.
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In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 2 to 2-1/4 percent. This action supports the Committee’s view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain.
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The Committee will conclude the reduction of its aggregate securities holdings in the System Open Market Account in August, two months earlier than previously indicated.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; and Randal K. Quarles. Voting against the action were Esther L. George and Eric S. Rosengren, who preferred at this meeting to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent.

But the tone for the future was relatively hawkish:

The Dow and S&P 500 suffered their biggest daily percentage drops since May 31 on Wednesday after the Federal Reserve cut interest rates for the first time in a decade, but remarks by Fed Chair Jerome Powell dampened expectations for further cuts going forward.

Based on the latest available data, the Dow Jones Industrial Average fell 336.26 points, or 1.24 per cent, to 26,861.76, the S&P 500 lost 33.07 points, or 1.10 per cent, to 2,980.11, and the Nasdaq Composite dropped 98.20 points, or 1.19 per cent, to 8,175.42.

In Toronto, the S&P/TSX composite index also dropped, closing down 0.36 per cent, or 59.49 points, at 16,406.56.

The five-year Canada yield was unchanged at 1.45%.

PerpetualDiscounts now yield 5.59%, equivalent to 7.27% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.36%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now an amazing 390bp, a significant widening from the 375bp reported July 24. We also saw a spread this wide on June 19 … but it’s pretty damn rare!