Market in a Minute: Aug 5-9, 2019
by Rich and Sheila Jamison
The major averages each lost more than 3% on Monday, 2019’s worst one-day performance. Overshadowing the usual trade and growth concerns, currencies and bond yields seized center stage.
In an apparent retort to President Trump's newest tariff threat, China allowed the yuan to weaken beyond the seven per dollar mark sparking Monday’s deep selloff. When China subsequently signaled it will keep the yuan stable, equities recouped some losses on Tuesday.
US Treasury yields fell sharply on Wednesday, further flattening the yield curve. The 10-year US Treasury yield fell into the 1.6 percent range before settling at 1.73%, appreciably below 1.86% a week ago. With that startling leg lower, the market gave back Tuesday’s gains.
At the end of a wild week with yields somewhat stabilized, equities finished well off Monday’s lows despite lingering trade and growth concerns. The defensive-oriented real estate (+1.8%) and utility (+1.0%) sectors led the gainers. Energy (-2.2%) and financials (-1.7%) finished lowest.
West Texas Intermediate crude oil declined to $54.61. As oil prices fall, Saudi Arabia is contemplating additional production cuts.
The CBOE’s Volatility Index, VIX, spiked to 24.8 on Monday afternoon (its highest level since January) before retreating to 18.0 by Friday’s close, marginally higher than its 17.6 a week earlier.
Monday’s Selloff Trigger
China allowed its currency, the yuan, to weaken past seven to the dollar on Monday for the first time since the global financial crisis. The action was seen as a countermeasure meant to offset some of the drag on China's economy caused by a fresh round of US tariffs. It sparked heavy selling in global equity markets early in the week, though efforts to moderate the currency's fall helped stabilize markets later in the week. While a weakening currency makes Chinese goods more affordable overseas, rapid currency devaluations can spark capital outflows, further destabilizing markets. The US Treasury Department countered the currency move by branding China a currency manipulator, which sets off a yearlong process of negotiations involving the International Monetary Fund.
Yields have been in a steady decline since November. Low yields – and the expectation that they will stay low with central banks signaling easier monetary policy – are being seen as the catalyst behind this year’s equities rally. However, the narrowing 2-yr: 10-yr yield spread sparked Wednesday’s selloff. The 2-10 spread hit its smallest value since 2007. It is widely viewed as a possible indicator for a recession. As the week ended, the 2-yr yield had lost eight basis points (to 1.63%). The 10-yr yield lost 13 basis points (to 1.73%). (See last week’s central bank rate cuts in the Globally section)
China also officially halted purchases of US agricultural products and president Trump said the US will not be doing business with China's Huawei without a trade deal.
Almost getting lost in last week’s turmoil, nearly 90% of S&P 500 Index constituents have reported their Q2 2019 results. Blended earnings per share (reported data plus estimates for those yet to report) currently average -0.8% year over year. Revenue is expected to grow approximately 4% compared with the same quarter a year ago. Expectations at the start of the reporting period were for a deeper decline in EPS of around -2.7%.
A number of Asian central banks continued to cut interest rates cut interest rates. The Reserve Bank of New Zealand cut the most aggressively, dropping its official cash rate a half-percent to 1%. The Reserve Bank of India cut its repo rate 0.35%, to 5.40%. The Bank of Thailand and the Central Bank of Philippines each cut rates by a quarter-point. The moves come amid the aftermath of the prior week's cut by the US Federal Reserve and the intensifying trade clash between the US and China.
Bond yields in Europe fell to record lows. Yields in the UK fell below the levels posted in the immediate aftermath of the Brexit vote in 2016.
The British economy shrank in Q2 for the first time since the last quarter of 2012. Activity was negatively affected by worries over a slump in global trade and the increasing likelihood of a disorderly Brexit or a general election. It was reported this week that the European Union's base case is now that there will be a no-deal Brexit.
Germany is considering abandoning its balanced budget in order to make investments in a climate protection program. The additional government outlays are expected to provide a modest fiscal stimulus at a time when the German manufacturing sector is being battered by uncertainty surrounding the US/China trade battle and Brexit.
Japan's economy grew much faster than expected in Q2, expanding at an annual rate of 1.8%, compared with expectations of a more muted 0.4% rise. The consumer spending and capital expenditure components were particularly robust.
After months of speculation, Italian Deputy Prime Minister Matteo Salvini has set in motion the dissolution of the country's unusual left-right coalition government. Salvini's party, the League, holds a wide lead in opinion polls. It is expected to be able to form the next government with support from smaller right-of-center parties. Italian bond spreads widened Friday on concerns that a League-led government would be likely to butt heads with the EU over budget deficits.
Pakistan has suspended bilateral trade with India and expelled India's ambassador in reaction to India's ending the special status of Kashmir and Jammu, giving the Indian government greater control over the disputed region.
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