The Market Today
U.S. vs E.U.; U.S. vs China; U.S. vs Canada
by Craig Dismuke, Dudley Carter
At 8:45 a.m. CT, the August Chicago Purchasing Managers’ Index is expected to show a pullback from 65.5 to 63.0. The details of the report are no longer disseminated freely diminishing the value of the, otherwise, minimally important report. At 9:00 a.m., the University of Michigan’s final revision to August’s consumer confidence is expected to show a slight uptick after a strong Conference Board result earlier in the week. The biggest focus for traders today will be ongoing trade talks between U.S. and Canadian officials.
Yesterday – China, Emerging Markets, and President Trump’s Trade Comments Drove Risk-off Trade on Thursday: A confluence of factors pushed U.S. equities lower Thursday and kept an early bid for Treasurys firm throughout the day. Global stocks had weakened ahead of U.S. trading with a negative day for Chinese equities souring the global tone early. In addition, signs of concern related to the health of emerging markets reemerged as the Argentinian peso crashed more than 12% to a new all-time low against the Dollar. The currency had been down more than 17% but cut into those losses after the country’s central bank raised a key 7-day borrowing rate from 45% to 60%. In addition, the Turkish lira dropped nearly 3% and the Brazilian real lost just under 1%. However, equities had weathered those pressures well and actually trended higher before spiking lower on a report that President Trump could support moving forward with the proposed 25% tariffs on $200B of imports from China as early as next week. The public comment period closes next Thursday. For the day, the S&P 500 slipped 0.4% with materials dropping 1.3% to lead all losses. Financials were the second worst performers with a 0.8% loss. Treasury yields had dropped overnight, slipped further as equities weakened, and inched even lower after the headlines on trade with China. For the day, the 2-year yield dropped 2.6 bps, the 5-year yield closed down 3.2 bps, and the 10-year yield settled 2.9 bps lower.
Overnight – Trade Tensions Weigh as Global Investors Prefer to Carry Less Risk into a Long U.S. Weekend: The negative effects on risk sentiment from yesterday’s report that President Trump was ready to move forward with the next round of Chinese tariffs has rippled through global markets Friday. Chinese equities again led widespread losses across Asia with the negativity intensifying in Europe. The Stoxx Europe 600 was down 0.6% with larger losses seen in France (-1.1%) and Germany (-0.8%). Europe wasn’t spared from the president’s trade criticisms. After the report that the White House was readying the next step for China, President Trump said “The European Union is almost as bad as China, just smaller.” When asked about the EU’s morning offer to drop auto tariffs, he said “It’s not good enough.” Overnight, the EU’s Juncker said he expects the July 25th handshake agreement with the U.S. to table further tariffs while negotiations were ongoing to be upheld. If it’s not, however, Juncker said the EU will be forced to retaliate. The pressure from those tensions, as well as the President reiterating a willingness to pull out of the WTO, could be eased or added to by headlines from today’s NAFTA negotiations between the U.S. and Canada. With a deadline set for the close of business today, there remains a great deal of uncertainty. Yesterday, President Trump said “Canada’s going to make a deal at some point. It may be by Friday or it may be within a period of time.” Already this morning, The Globe and Mail reported “There is now deep concern within the Canadian negotiating team that the talks which continue Friday morning will end in failure.” The Canadian dollar dropped to its lows of the day on the headline. Earlier, the Treasury curve was flattening and near the lows of the day, with the 2-year yield 1.2 bps lower and the 10-year yield down 2.0 bps.