Markets take a breather as trade tensions ramped
SEP. 11, 2018
- Equity markets fell for only the second week since June, as investors focused on continued trade tensions and shifted out of high-beta technology names as executives from Facebook and Twitter again addressed Congress. Volatility returned, as investors returned from the Labor Day holiday with increased nervousness, resulting in the VIX jumping to the highest level since early July.
- August’s payroll report showed 201k additions, ahead of the 189k consensus expectations. The previous two months were revised lower to 217k and 208k, respectively, bringing the three-month average of 185k to the lowest level since November 2017. The highlight of the report was wage growth, with average hourly earnings reaching a cycle high of 2.9% versus a year ago, perhaps allowing the continued acceleration in consumer spending. A sign of the strength in the job market is shown in the “quit rate” (number of quits as percent of total employment) which rose to an 18-year high. In an interview, White House economic advisor Larry Kudlow referenced the strong and widespread wage gains, and the improvement in capital goods spending.
- Developed and emerging markets continue to struggle, with growing worries around the impact of the trade disputes and contagion from countries with credit concerns. There is growing speculation that Italy is considering an exit from the E.U., driven by the populist government made up of the right-wing Lega party and left-leaning Five Star Movement. The coalition is expected to unveil the 2019 budget next year, with speculation of €30b in additional spending, growing budget deficits to 1.5-1.8% of GDP. Eurozone PMI data pointed to continued expansion in services and manufacturing, while business confidence in future activity continued to weaken to the lowest level in 23 months. Global trade tensions and the unknown impact on future activity undermined confidence.
Investor attention was again focused on trade tensions. Talks between the U.S. and Canada seem more upbeat, though no conclusive agreement was reached. The deal with Mexico reached on August 31 notes a plan to sign the deal within the next 90 days, and could include Canada “if it’s willing.” Hopes faded late in the week on the idea of the U.S. and China reaching a trade deal. Trump told reporters Friday that he was “ready to go” on tariffs for another $267 billion in Chinese goods, which would come on top of the $200 billion in goods already targeted. Public comment on the details of the $200 billion were due on Thursday, paving the way for a public announcement. In addition to the current scope of trade negotiations, Trump seems to be adding Japan to the list of targets, noting that his relationship with Japan was positive, but he is focused on eliminating trade deficits with all trading partners.
Performance continues to be weak for EM, driven by trade tension and the rising dollar. Idiosyncratic risk in Argentina and Turkey had led to 50% declines in their respective currencies, with increased nervousness on contagion effects. The performance gap between domestic equities and emerging markets is historically wide, and will likely narrow if the trade dispute fades.
Technology stocks fell this week, with notable weakness in Facebook, Twitter, Netflix and Tesla. Worries about governance issues and pressure from Washington gained attention, which is likely part of a handoff in market leadership from momentum names to quality.
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