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On Wall Street, A Summer Meltdown

... stunned traders, disillusioned investors and indifferent algos looked haplessly to one another for answers. 

US stocks ended near the lows on Friday, as stunned traders, disillusioned investors and indifferent algos looked haplessly to one another for answers.

But there were no answers to be had. Donald Trump lost his cool and, during a fit of rage, likened his Fed chair to the Communist autocrat with whom the US is engaged in an increasingly intractable economic cold war.

Trump, who we learned this week cannot even suffer the slight of being told he can’t buy Greenland, was in no mood to digest retaliatory tariffs from China. He took his frustrations out on Jerome Powell and the rest, as they say, is history.

Read more: ‘Is That Even Legal?’ Analysts, Traders Incredulous As Friday Conflagration Engulfs Markets

The VIX had another outsized move to the upside and US stocks careened nearly 3% lower, in the third bloodbath of the month (there have been three days in August during which the S&P has fallen in excess of 2.5% in a single session).

It was the fourth weekly loss in a row, the worst stretch since May, when Trump broke the Buenos Aires truce.

Tech and energy shares were bludgeoned. The SOX fell a truly heinous 4.3% in one of the five worst sessions of 2019.

Energy shares are riding (another) horrendous streak of weekly losses.

Gold at $1,537 is basically just escape velocity at this point, with the prospect of negative real yields and the flight-to-safety turbocharging an already furious rally.

In the same vein, the Treasury ETF is on track for one of its largest monthly gains since the crisis.

After the bell, Trump raised tariff rates and other measures are likely forthcoming, especially if China lets the yuan fall further next week. One imagines Steve Mnuchin and Larry Kudlow urged caution, while Peter Navarro argued for a “fire with fire” approach. (Navarro was live on Fox Business when the news started coming in on Friday morning.)

Trump has likely increased the odds of more rate cuts from the Fed, but the problem is that past a certain point, monetary policy will not be able to cushion the blow to sentiment from an all-out trade war with China. With consumers becoming more concerned about a possible recession in the US, the administration would do well to avoid days like Friday on Wall Street like the plague.

Remember, when it comes to the biggest risk from the trade conflict to US growth, it’s not the mechanical impact of the tariffs that really matters – rather, it’s the financial conditions impulse, which is sensitive to big declines in equities.

(Goldman) 


 

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9 comments on “On Wall Street, A Summer Meltdown

  1. Anonymous

    Tariff Man just upped the %’s on the existing and upcoming China tariffs. Look out EU leaders this weekend! One wrong move and Trump is going to use his Tariff Ray on you…!!!

  2. Anonymous

    Long overdue lots more hot air in stocks. FANGMAN stocks are still way way way overvalued

  3. A 25 bp cut will have little positive effect on this dynamic, and may have a greater negative signaling effect (two types of signaling, to investors and to Trump). Ditto 50 and even 75.

  4. If I remember my Mythology there was this Greek Youth called Icarus and Daedalus ( I think his father) and they were trapped in Ctete in a Tower so they thought they could make wings and fly out ..Seems the wax melted on Icarus’s wings because he got to close to the Sun and he perished… Kind of reminds me of Trump and this bubble that really isn’t a bubble….lol

  5. Hey, the weekend is just getting started. Trump and his band of sycophantic fools will be at the G7 over the weekend, and the only person there less popular than Trump will be Peter Navarro. (If he makes it; rumor has it that’s he’s been ordered to fly coach.) What could go wrong? Dow futures down 550+ at the moment.

  6. (Dear H. Thanks for this marvelous platform. You need to add edit functionality for comments. Thank you in advance.)

  7. 5% tariff on US Oil imports is the first step in what I believe is the true nuclear option for China: buying oil from Iran. End game for this scenario is a trump impeachment. China buys oil from Iran —> trump threatens war with China —> the new-fascist party controlling the Senate finally does their job and agrees to support impeachment.

  8. Anonymous

    Trump’s retaliation is pretty tepid (5%) and no pulling the Dec tarrifs closer and markets will see it as a sign he really wants deal to save his 2020 chances. Of course the “deal” will be neutral to negative for the US but he will pitch it as a win. His only hope is to end this so a recession is avoided (still can be done)

  9. The die has been cast… as far as 2020 recession is concerned….Trump Toast anyone?

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