Friday, August 23, 2019

Positive tone sours as trade war escalates Weekly Market Update: Positive tone sours as trade war escalates
Fri, 23 Aug 2019 16:07 PM EST

Markets opened the week on a positive note helped by talk of fiscal stimulus around the globe and the expectation key central bankers would offer dovish commentary later in the week from Jackson Hole. Weak global growth and continued uncertainty on trade induced speculation that officials in Germany, Washington DC and across Asia were looking for measures to ensure growth. To that end China announced new measures on lending that effectively resulted in the lowering of a key interest rate. The ECB’s Renh emphasized they stand ready to significantly increase stimulus measures, while President Trump kept up his rhetoric calling on the Fed to cut rates by 100 basis points and confirmed the White House is looking at new tax cuts, though not imminently. The Commerce Department granted Huawei an additional 90 day extension on a license that allows the company to conduct some business with US customers, which was taken as a constructive move on the trade front. UK PM Johnson met with key leaders in Europe raising hopes that a path towards a Brexit deal could forged, however unlikely it still appeared. As PM Conte stepped down in Italy markets were encouraged by President Mattarella granting the Five Star and PD parties enough time to come up with a coalition deal to avoid a new election.

The tone changed significantly though as the week drew to a close, as press reports speculated China was readying retaliatory tariff measures. On Friday, China confirmed those reports by announcing plans to levy tariffs on $75B in US goods effective September 1st, with some addition levies going into effect in mid-December, mirroring the timing of the next round of US tariffs. The news came alongside Fed Chairman Powell’s highly anticipated speech at Jackson Hole. Ultimately the Fed Chair offered little in the way of new ground, suggesting the wide array of views held by policymakers will continue for some time. He acknowledged low inflation remains the conundrum of the current central bank era and reiterated that policymakers stand ready to act to keep the expansion going. Futures continued to project a 25 basis point cut as inevitable next month, but the path after that remains unclear, beholden to things like Brexit, Hong Kong, and tariffs as Powell enumerated. The President reacted quickly on twitter, insuating both Chairman Powell and President Xi were both enemies of the US while indicating his administration would soon announce new measures to deal with trade and the byproducts of a Fed Reserve that is not as accommodative as Trump sees fit. The US 2-10 year spread bobbed in and out of negative territory and rates generally moved lower. Stocks and other risk assets tanked into Friday afternoon. Copper hit another 2+ year low and gold prices pushed back towards the highs of the year. The Friday selloff pushed stocks into their fourth straight down week: the S&P500 lost 1/4%, the DJIA dropped 1%, and the Nasdaq fell 1.8%.

Earnings from major retailers led corporate news headlines this week. Home Depot reported a beat but trimmed its sales outlook due to lumber and tariffs. Lowe’s shares surged after its profitability came in well above forecasts despite inclement weather. Kohl’s EPS topped estimates, though same store sales came in under consensus, pushing shares modestly lower. Target posted a large beat and raised its outlook, noting volume boosts from in-store pickup and same-day shipping, sending shares up 20% to record highs. Gap reported revenue below consensus and weaker than anticipated comp sales due to a ‘challenging environment.’ Toll Brothers shares slipped post earnings, though they pointed to a good start in Q4. Salesforce stock rallied on a revenue beat and forecast raise, soothing investor concerns about the cloud giant’s recent acquisition of Tableau Software.

SUN 8/18
*(CN) China PBoC announces new interest rate reform plan, Loan Prime Rate (LPR) as the new Benchmark Reference Rate to be used by banks for lending (aimed at supporting funding for small businesses); to be set monthly
(US) President Trump: China tariffs have cost nothing or very little, China wants to make a deal, we'll see what happens; humanitarian outcome in Hong Kong would be good for trade deal; China President Xi has something in mind to do with trade, reiterates not ready to make a deal with China - speaking from New Jersey

MON 8/19
(DE) Germany reportedly targeting job creation, domestic market in potential stimulus measures as contingency for crisis - US financial press
(US) Commerce Sec Ross: Confirms US granting Huawei another 90 days for some business; Added 46 more subsidy to Huawei 'entity list' - Fox business
(US) President Trump tweets: Fed should cut by at least 100 bps; strong dollar is hurting other parts of the world
(EU) ECB's Rehn (Finland): Reiterates stance that ECB needs to provide a significant degree of monetary stimulus to ensure that financial conditions remain very favorable and to support euro area growth and domestic price pressures"
BIDU Reports Q2 $1.47 v $0.94e, Rev $3.84B v $3.77Be
(US) White House reportedly considering temporary payroll tax cut in effort to reverse weakening economy - Washington Post
(US) State Attorney Generals to move ahead with antitrust investigation of big tech companies, looking at marketplace dominance - US financial press

TUES 8/20
HD Reports Q2 $3.17 v $3.08e, Rev $30.8B v $31.0Be
KSS Reports Q2 $1.55 v $1.52e, Rev $4.43B v $4.46Be

WEDS 8/21
LOW Reports Q2 $2.15 adj v $2.00e, Rev $21.0B v $21.0Be
TGT Reports Q2 $1.82 adj v $1.61e, Rev $18.4B v $18.3Be
(US) Labor Dept: prelim estimate of nonfarm payrolls benchmark revision would reduce March 2019 employment level by 501K, or 0.3% - press
(JP) Japan Investors Net Buying of Foreign Bonds: ¥499.7B v ¥175.8B prior week; Foreign Net Buying of Japan Stocks: -¥359.6B v -¥187.1B prior week
(KR) Bank of Korea (BOK): Japan export curbs could be more damaging to local economy than tariff hikes; chip exports likely to continue to fall y/y for the duration of 2019

THURS 8/22
(CN) China Commerce Ministry (MOFCOM) spokesperson Gao Feng: despite delayed tariffs from US, any new tariffs to lead to trade escalation; urges US to stop imposing new tariffs
*(FR) FRANCE AUG PRELIMINARY MANUFACTURING PMI: 51.0 V 49.5E (moves back into expansion and highest reading since Nov 2018)
*(EU) EURO ZONE AUG PRELIMINARY MANUFACTURING PMI: 47.0 V 46.2E (7th straight contraction, but highest reading since Jun 2019)
*(EU) ECB ACCOUNT OF POLICY MEETING (JULY MINUTES): Widely agreed on need for accommodative stance for prolonged period
*(US) AUG PRELIMINARY MARKIT MANUFACTURING PMI: 49.9 V 50.5E (lowest since Sept 2009)
(DE) Reportedly Bundesbank sees no need for Germany fiscal stimulus right now
(US) Fed's Kaplan (dove, non-voter): would like to avoid cutting again in Sept, but will have an open mind about taking further action in next few months - CNBC
CRM Reports Q2 $0.66 v $0.47e, Rev $4.00B v $3.95Be
GPS Reports Q2 $0.63 v $0.52e, Rev $4.01B v $4.02Be; affirms FY19 guidance

FRI 8/23
(CN) Global Times Editor-in-chief Hu Xijin tweet: Based on what I know, China will take further countermeasures in response to US tariffs on $300 billion Chinese goods. Beijing will soon unveil a plan of imposing retaliatory tariffs on certain US products. China has ammunition to fight back. The US side will feel the pain.
(US) Fed's Bullard (dove, voter): market has expectations for low inflation, TIPS breakeven suggest only 1% inflation over next 5-years; we should "take out more insurance against the downside risks"; expect "robust debate" about 50bps cut in Sept - TV interviews from Jackson Hole
*(CN) CHINA TO LEVY 5-10% RETALIATORY TARIFFS ON $75B OF US GOODS; effective on Sept 1st and Dec 15th
(CN) Pres Trump promises to respond to China's tariffs 'this afternoon'; 'orders' American companies to immediately start looking for an alternative to China
(DE) Germany govt document: govt does not see a need for short term economic stimulus; govt does see a recession in Germany, forecasting a second consecutive quarter of contraction in Q3 - German press