Markets Choke – US Accuses China of Currrency Manipulation

• China says “We are not a currency manipulator”

• US Futs plunged another 600 pts overnight

• China steps in to stabilize Yuan

• US futs rebound and now look to open higher (that’s relative)

UGLY, UGLY, UGLY……Global mkts shuddered and the US mkt got smashed…..By now you know – the Dow fell nearly 1000 pts before finding any stability, only to thrash around and end the day down 767 pts or 2.9%. The S&P, Nasdaq and Russell also all moved lower during the day before finding support and ending the day just off their intraday lows.  By the time the bell rang – the S&P lost 87 pts or 2.98%, the Nasdaq gave up 278 pts or 3.47% and the Russell gave back 46 pts or 3.02% -  eclipsing the performances of any of the developed mkts around the world.  And while it all looks fairly ugly (and on a one day time frame it was) let’s just understand one thing.  The S&P is off 6% from the  highs, the Dow is off 6.2%, the Nasdaq has given up 7% and the Russell is off by 8.7%.  So this is not necessarily a complete disaster at all.   In fact – remember – moves like that are considered within the normal range of mkt moves – it’s when it happens in such a short term time frame that it becomes ‘uncomfortable’. 

The Chinese ignited the fire while we were asleep on Sunday by allowing the Yuan to depreciate…..an option that was always available to them, but one that they chose not to use unless it became a last resort…and guess what – It became a last resort…. Quick re-wind - by now you know that Donny lit the flames on Thursday when he announced that the US would impose new 10% tariffs on Chinese exports that had been left untouched.  That action on Thursday – announced via Twitter (preferred method of diplomacy) initially roiled the mkts and caused the algo’s to choke….sending all of the major indexes lower on Thursday and Friday….. but, the Chinese were not going to let a good crisis go to waste – oh no, not at all. They made that very clear to the mkts…..They will respond. 

Friday night mkts closed off relatively unscathed and the weekend was upon us…..all the while the Chinese were deliberating, making a plan, readying to launch the first shot across the bow of the US – as Donny had launched a number of shots across their bow – all in the form of tariffs.  With each day that has passed since January 2018 – 19 months or 570 days….Donny has tested the US/China relationship –  a relationship that needs to be modernized. I mean, this is the 21st Century – a lot has changed since the time trade was negotiated, and the President intends on addressing it no matter what the short term costs.  We all know the issues that need to be addressed: Intellectual Property Theft, Forced Transfer of Technology and massive subsidies are only just a few of the issues that need attention, and until we get some real movement on this we can expect the trade war to continue.

Now yesterday’s news adds a new dimension to the conversation…..the role of currencies in applying pressure to negotiate.  There was a lot of talk about whether this is a ‘Currency Crisis’ or a ‘Currency War’ – and there is a difference… A crisis suggests that the Chinese have lost control of their currency, while a war suggests that they know damn well what they are doing…..and in my opinion – Sunday’s action represents a war, NOT a crisis.  It felt deliberate, it felt like a poke in the eye to Trump, a way to say – ‘What are you doing?’  We are in the middle of trying to negotiate and you went and threw gas on the fire – why?’ Now, if it continues and the Yuan gets weaker and weaker – it is possible that it becomes a crisis and that they lose control of their currency, but we are not there yet.    

The Chinese are ‘annoyed’ at Donny and are clearly not happy about the NEW tariffs that Trump has suggested he will impose beginning in September.  Both sides continue to ‘negotiate’  but we must ask - Are they really negotiating?  Two months ago – Treasury Sec Stevey Mnuchin told the world that we were almost complete, that a deal was within sight, etc.– that was the last time the mkts came under pressure. When the administration tried to calm the mkts…How’d that work?  It did – he was successful in calming the mkts and changing the course of the conversation for a while, investors/traders/algo’s bought in and the mkts went to new highs…..but then nothing.  No advances in the negotiations, in fact – the negotiations started to fall apart.  All the handshaking and kissing babies for naught…..And then another attempt at advancing the ball down the field failed last week, so Donny announces the next set of tariffs and surprises not only the mkts but the Chinese as well (in fact, it appears that he surprised Mnuchin and Lighthizer too!).   Then overnight – the US declares the Chinese a currency manipulator – raising the temperature again.   Trump tweeting:

“China has always used currency manipulation to steal our businesses and factories, hurt our jobs, depress our workers’ wages and harm our farmers’ prices, Not anymore!” 

And this is sure to escalate trade tensions even more…..

Now overnight – US futures tanked again as the US accuses China of being a currency manipulator – with the S&P piercing its long term moving avg at 2790 – falling as low as 2775 by 8 pm last night….and then China moved to stabilize the Yuan – setting the midpoint at 6.9683.  It was then that the tone changed and futures turned higher and at 7 am this morning US futs have all gone positive….now positive is a relative term….Dow futures are up 224 pts or 0.8%, S&P +26 or 0.9%, Nasdaq +83 or 1.07%  and the Russell is up 7 or 0.4%. 

Asian stocks slipped overnight – partly in reaction to the beating that the US mkts suffered and partly in reaction to the intensifying rhetoric over trade.  China refutes the idea that they are manipulating their currency and stepped in to stabilize it saying that:

“the label seriously undermines international rules and will have a major impact on global finance and economy”

Either way – it did little to stop the bleed in Asia. By the end of the day – Japan -0.65%, Hong Kong -0.67%, China – 1.07% and ASX -2.44%.

European stocks are cautiously higher this morning….after China steps in to stabilize the Yuan – this viewed as a way to ease the hot rhetoric.  In addition – EU macro data included:  German Manf Orders jumped by 2.5% vs. the exp of +0.6%  but the details of the report do suggest continued weak demand.  FTSE +0.07%, CAC 40 + 0.88%, DAX + 0.54%, EUROSTOXX + 0.61%, SPAIN +0.26% and ITALY +0.36%.

Expect continued volatility for the US and global mkts going forward….the VIX (fear index) shot up another 40% yesterday – ending the day at 24.59 bringing the latest move in this index to better than 100%.  This morning the VIX is retreating a bit as the tone of the mkts appear to be one of more calm.  That being said – when we see a spike like this in the VIX – the we can expect to see continued volatility for about 2 or 3 weeks – unless we get some kind of real news on trade -which doesn’t feel like it at the moment.  As noted – the S&P did breach its 200 dma at 2790 overnight and my sense is that while we got close to it yesterday, we didn’t test it – and I expect that we will test it before this is over. We need to test – we have broken all other supports, so it has to happen. The Dow tested it’s 200 dma yesterday, the Transports has clearly BROKEN its 200 dma, the Russell is well below its 200 dam and the Nasdaq – like the S&P, has yet to test it. My gut says – hold on….we have to test. This mornings ‘feel good’ mood is most likely short-lived as ‘technically’ the mkt needs to do some work…..and a test lower is one of the requirements – but you want to see the 200 dma’s HOLD for the Dow, the S&P and the Nasdaq….if they do not – then we can expect another wave of real sell pressure as the algo’s that operate on technical measures will go into overdrive if those indexes fail to hold.  Stay tuned – not time to sleep.

St Louis Fed Pres Jimmy Bullard is due to speak at 1 pm – expect everyone to listen to what he has to say about FED policy.