With about a half hour to go before the closing bell sounded on an abysmal week for Wall Street, US equities had nearly managed to claw back the entirety of Friday’s losses.
That was no small feat considering how poor sentiment was following Donald Trump’s latest trade escalation with China, which pushed Asian equities sharply lower and drove European shares to their worst day since early December.
Alas, a final batch of Trump headlines started crossing the wires shortly before the close, pushing stocks lower in a fitting end to the worst week of 2019. By the time the dust settled, the S&P was down more than 3%.
“[We] can raise the China tariffs to a much higher number”, Trump said, around 3:45 in Washington. “They have to do a lot of things to turn it around”, he added.
Again, a fitting end to a week that was defined by bungled policymaker communications and unwelcome trade bombast.
This was also the worst week of the year for everyone’s favorite mom and pop high yield product and the second-worst week since Vol-pocalypse for the emerging market equity ETF.
Crude managed a bit of a comeback on Friday after the worst rout since 2015. As noted on Thursday, the prospect of demand destruction triggered by ongoing trade tensions has bedeviled oil bulls all year.
As Goldman explained on Friday, the same factors that helped catalyze the November collapse in oil likely played a role on Thursday as well. “We believe this first reflects negative gamma effects, when prices trade through option strikes of significant put option open interest, with WTI prices gaping as they traded through $55/bbl, a similar pattern to what took place late last year”, the bank said, adding that the move “also reflected low conviction from recent speculative buying given these ongoing growth concerns, with a similar pattern of quick unwinds of recently added net speculative length in recent weeks”.
(Goldman)
This was among the best weeks for TLT in five years. 10-year US yields ended all the way down at 1.84%, after plunging to the lowest since prior to Trump’s election.
From here, it’s all about how the Fed responds to the latest trade uncertainty. Of course, that’s an impossible balancing act. Trump has clearly figured out that engineering rate cuts is as easy as ratcheting up the tension with China and the Fed is undoubtedly aware that the president is playing them.
The July jobs report suggests the US economy hardly needs rate cuts, which makes it even more difficult for Jerome Powell to ease without being accused of politicizing monetary policy. The Fed can lean on sub-par manufacturing data, if they like, but nobody is going to believe that further rate cuts aren’t the result of Trump’s actions, either his exhortations to loosen policy, his efforts to compel rate cuts with trade balderdash or both.
On Friday, during the same remarks mentioned above, Trump said auto tariffs on the EU “are never off the table”.
Earlier, at an event convened to celebrate the signing of a beef agreement with the EU, Trump drew uncomfortable chuckles when he joked that “we’re working on a deal with the European Union where they’ll agree to pay a 25% tariff on all Mercedes Benz and BMWs coming into our nation, so we appreciate that”.
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“I’m only kidding”, he quickly added.
The algos do not appreciate that kind of thing, Mr. President.
Lower rates are normally welcomed as the Fed rescuing the economy, but if each rate cut “costs” an additional $30BN in tariffs, will investors’ jubilation reflex start to fade?
I think most investors know that rate cuts won’t heal the tariff wounds to trade, transport, ag, manufacturing, and now retail. Take the interest expense in a typical company model, trim it to reflect 25 bp lower debt cost, the impact on EPS is minimal and greatly outweighed by even a small trim to revenue growth or margins. The companies with debt levels so high that 25 bp makes a big difference are probably high yield anyway and exposed to spreads. Rate cuts will also add pressure on bank margins and, at some point, lending appetite.
Sure, lower rates do mechanically lift DCFs but how much $ is run on DCF models?
great comment