The Market Today

Hong Kong – China Tensions Ramp up Sending Yields Lower Yet


by Craig Dismuke, Dudley Carter

THIS WEEK’S CALENDAR

CPI, Retail Sales, and Geopolitics: This week’s calendar will bring the key CPI inflation and retail sales reports.  There are no releases scheduled for this morning.  The July CPI inflation report, scheduled for Tuesday, is expected to show core inflation up 0.2% bringing the year-over-year rate up from 1.6% to 1.7%.  Inflation has proven weaker than expected repeatedly in 2019.  Thursday’s calendar is full of data, but the July retail sales data will headline the news giving additional insight into the stability of the consumer.  Sales are expected to be strong, once again.  However, investor focus will remain on developments between U.S. and China, China and Hong Kong, and Eurozone flashpoints.


TRADING ACTIVITY

Overnight – Treasury Yields Rally as Stocks Slump on Weaker Yuan and Hong Kong Worries: Trade tensions ripped through global markets last week and remained a focus for investors on Monday. Treasury yields tumbled to new multi-year lows last week as investors feared China might have broken the ice on using their currency as a weapon in the ongoing trade tussle with the U.S. (more below). After weakening its official yuan peg by 1.7% last week, the PBOC dropped the currency for an eighth consecutive session Monday, albeit by less than markets expected. China’s central bank set the official peg at 7.0211 per dollar, its weakest level since April 2008. While China’s CSI rose 1.8%, Hong Kong’s Hang Seng slipped 0.4% amid escalating protests in the country. The political unrest, which began more than two months ago, infiltrated the country’s airport and led to the cancellation of more than 100 flights. The headlines have given investors little reason to break with the uncertainty that has weighed on markets during the month of August. About the time news of Hong Kong’s flight cancellations hit the wires, Europe’s Stoxx 600 gave up its early gains to trade 0.3% lower. U.S. futures also slumped into negative territory to push the S&P 500 down 0.7% around 7 a.m. CT. Treasury yields dropped more than 5 bps, with the 2-year yield falling to 1.60% while the 10-year yield slipped to 1.69%, which would represent a new low close since October 2016.


NOTEWORTHY NEWS

ICYMI – August 9, 2019 Weekly Market Recap: An awful August start for markets got worse last week as investors feared China could weaponized the yuan in its trade battle with the U.S. Treasury yields started last Monday sharply lower after the PBOC weakened its yuan peg to an eight-month low, sending the onshore traded currency through the key 7-per-dollar level. Shortly after, media outlets reported that China has instructed state-owned enterprises to cut off all imports of U.S. agricultural products. The news, seen as a significant escalation of the trade situation, pushed the S&P 500 down 3% Monday, marking its worst trading day of 2019, and led to the U.S. Treasury officially labeling China a currency manipulator. After three smaller global central banks surprised markets Wednesday with rate cuts aimed to combat global economic uncertainty, the 10-year yield fell to as low as 1.5931%, the lowest since October 2016. The yuan continued to weaken for the remainder of the week, which was capped by comments from President Trump that compounded investors’ concerns that trade situation could be spiraling beyond repair. The president said “we’re not ready to make a deal” with China and “we’ll see” if the planned meeting for September is kept on the calendar. While trade tensions dominated the headlines, markets were also faced with a three-year low for the U.S. ISM services survey, cautionary comments from two Fed voters, and a raveling political coalition in Italy. Ultimately, the S&P 500 fell 0.4%, the 10-year yield dropped 10.1 bps to 1.75%, and spread between the 2- and 10-year notes flattened to 9.4 bps, a new cycle low. Click here to view the full recap.


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