China: I’ll See Your Tariff and Raise You a Currency Devaluation

By John Steele   |   August 7, 2019

Two short weeks ago when I penned JOYN’s Mid-Year Market Update, investors were cheerfully celebrating strong, positive returns in nearly all asset classes. On August 5th, major headlines proclaim a nearly 800-point sell-off in the Dow Jones Industrial Average.

What happened?!

3 THINGS…

THE FED

The market was hoping that the Fed would cut rates by 50bps (instead of 25bps) or at least signal that more 25bp rate cuts would be in the cards sooner rather than later. Instead, Fed Chairman Jerome Powell delivered a more hawkish cut than anticipated, framing the 25bp cut as more of a “mid-cycle adjustment” than a series of rate cuts.

THE PRESIDENT

Last week President Trump escalated the trade war with China by announcing a 10% tariff on $300 billion of Chinese imports. Subsequently, equities declined as investors sought safety in US Treasuries and gold.

THE RETALIATION

Not to be outdone by President Trump, China effectively devalued its currency by allowing the Yuan to fall to its lowest level against the US dollar in ten years. The Yuan depreciation makes China’s exports cheaper (and thus more attractive) than US exports. This latest edition of “beggar-thy-neighbor” trade policy (credit Adam Smith’s Wealth of Nations) is the primary catalyst of today’s market sell-off which is dominating headlines.

QUICK THOUGHTS

We still do not forecast a near-term recession, but investors should expect lower (positive) growth.

The Yuan devaluation was intended to support slowing growth in China; however, it will likely export deflationary pressures globally which is a net negative for the global growth outlook.

In step with falling growth estimates, WTI and Brent oil prices are likely to trade lower which will drag inflation expectations down and further pressure the Fed to cut rates in Q3.

The yield on the US 10-year Treasury hit its lowest level since November 2016 at 1.74%. This is good news for those of you looking to purchase a home or refinance your mortgage.

BOTTOM LINE

JOYN’s globally diversified portfolios (and tax loss harvesting strategy) are built to endure short-term market volatility. Unless you can predict how President Trump’s next Tweet will move markets, don’t get burned with short-term, emotion-driven trading.

 

Investment Advisory Services offered through JOYN Advisors, Inc. Registered Investment Advisors. Insurance offered through JOYN Atlanta, Inc. Securities offered through Securian Financial Services, Inc. Member FINRA/SIPC. JOYN Advisors, Inc. and its affiliates are not affiliated with Securian Financial Services, Inc.
The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this commentary is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time.
John Steele

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