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US, China Engineer Massive Yuan Rally, Stock Surge, But Fed Outlook Still Cloudy

The cross-asset reaction to the latest tariff news was quite dramatic.

The cross-asset reaction to the latest tariff news was dramatic.

The USTR’s decision to delay the imposition of duties on some key items until December 15 suggests the Trump administration is at least aware of the possibility that the next round of tariffs could seriously dent the outlook for the US economy at a time when growth is already slowing as the fiscal impulse wanes.

Risk asset performance since August 1 (when Trump tweeted the latest threat) reflects palpable jitters and China’s response last week (letting the yuan fall through the psychologically important 7 level) suggested Beijing had run out of patience.

Read more: Trump Folds, Delays Tariff Hike On Key Consumer Goods Until December

Although Trump has insisted he’s unconcerned about the market implications of the latest escalations, Tuesday’s coordinated announcements from the USTR and China’s Commerce Ministry (which released a statement almost simultaneously) shows the White House wants the situation to stabilize. After rebounding from a harrowing six-day plunge that culminated in the August 5 bloodbath, Wall Street cratered anew on Monday, rekindling concerns that a meltdown might be imminent.

Fast forward to Tuesday and the offshore yuan rallied more than 1.3%, a massive gain that rivals the scope of the August 5 plunge engineered by the PBoC.

For the Nasdaq, Tuesday was set up to be another banner session just days after the August 8 surge.

Semis are obviously loving the trade news, which sparked a rally large enough to make August 13 one of the best five days of 2019 for the SOX if it can hold.

Now, one of the big questions is what this will mean for the Fed. Obviously, any deescalation of trade tensions will reduce the near-term uncertainty, but kicking the can to December vis-a-vis tariffs on key items with the potential to move the needle on inflation could also be seen as clouding the outlook to the extent nobody knows what will ultimately happen between now and then.

Additionally, it’s possible that the administration is attempting to give the Fed some cover when it comes to cutting rates again in September, by removing the threat of imminent tariff-related price pressures. That said, it’s not clear that simply putting the decision off for three months is going to make too much of a difference in that regard.

The 2s10s was on the verge of inverting Tuesday when the trade news shook things up. The curve actually flattened further after the headlines crossed with the 2-year cheaper by 7bps on the day. The tariff headlines came a little over an hour after the latest read on consumer prices found core CPI coming in hotter than expected for a second straight month.


 

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7 comments on “US, China Engineer Massive Yuan Rally, Stock Surge, But Fed Outlook Still Cloudy

  1. The SEC should be watching for insider trading around these Administration flip-flops and tweets.

  2. How could anyone know in advance what Trump is going to tweet?

    My guess is as good as any traders would be.

    This was easily predictable…..Trump sees the Market tank and backs off on his trade demands.

    His idea of the economy has become Market performance, since that is what he is likely to run on. Two ways he can stimulate the Market……either pressure the Fed to lower rates or make trade concessions……and I think he is beginning to realize that trade policy has more impact than lower rates.

    • koala bear

      For trump to run on market performance, he’ll have to literally pull off a highly manipulated miracle of un-Godly proportions! He’s lagging Obama performance by a Yuge amount and with a very fragile global economic situation, it seems highly likely that trump will have to lie as never before to convince his drooling idiot followers that their bank accounts are better than they were 4 years ago.

    • Administration insiders know. The USTR lists of what products are tariff’ed in Sep vs Dec weren’t created overnight.

    • Dana Newman

      I moved all of my 401(k) to self-directed IRAs years ago. I got tired of playing that “one day your pants are up, next day somebody’s taking a dump in your pants when they’re down game.”

  3. koala bear

    A big driver in this game re-set, is the fact that VIX was 21.00 @ opening and 10 yr @ 1.68%, thus, fear was about to explode in a bad way, and instead of a Yuge 400 pt pop, we might have gone down Yuge, like 1000+ Plus, trump gets to make a nice gain with his hedge fund …

  4. Time will probably prove me wrong but I got out of an overwhelming majority of equities and gold today while my pants were up. I am happy not to participate in this freak show for the time being. Self directed IRA huh? Time for me to give that some consideration again.

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