Wall Street stumbled hard out of the gate in the new week amid thin summer trading. All the major US benchmarks were down more than 1%.
Weighing on sentiment was ongoing friction in Hong Kong, where flights were canceled as protests and social unrest continue unabated, raising fears that Beijing will ultimately intervene to restore order, even at the cost of damaging Xi’s international image.
At the same time, a shockingly large primary defeat for Argentina’s Mauricio Macri presaged a return to leftist governance in October, plunging the country’s assets into crisis overnight.
Emerging market equities are now lower by more than 5% in August. If things don’t turn around, this would be one of the top five worst months for developing nation stocks since the 2015 yuan devaluation.
Losses on Wall Street are a reminder that last week’s bounce off the August 6 rout may prove fleeting given the hodgepodge of geopolitical flashpoints in play.
As noted over the weekend, analysts aren’t convinced that a near-term rally back to record highs on the S&P is feasible.
Indeed, US assets have exhibited more sensitivity (relatively speaking) to the latest CNY volatility than “normal”. Have a look:
If you ask Goldman, there are two simple reasons you can cite when explaining why US assets are more sensitive to CNY than they’ve been over the last 14 months.
“First, the sectors targeted in this round of tariffs are likely to be more painful for the US consumer”, the bank writes. We’ve been over that point before. Here’s the projected breakdown:
Obviously, that is not good news for the US economy which lives and dies by consumer spending.
And speaking of that, Goldman cites the state of the US economy as the second factor which helps to explain the exaggerated impact across assets to the latest bout of CNY volatility.
“Most of 2018 was a story of US growth exceptionalism, supported by the fiscal boost of tax reform [which] filtered through to markets as US risk assets rallied through softening global growth and the initial rounds of tariff escalation over the summer”, the bank says, recapping.
By contrast, Goldman reminds you that “this new round of potential tariffs comes at a time when the US is on relatively weaker economic footing”. The bank’s Current Activity Indicator has now slowed to a two-year low of just 1.3% (on a three-month moving average basis).
This was always the risk, folks – that the trade war wouldn’t be resolved by the time the fiscal impulse wore off and the MAGA economy would suddenly be exposed to the same factors weighing on growth in the rest of the world.