Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
Trump’s economic sanctions against Turkey and exchange of verbal salvos with China regarding trade limited markets to small things during the week. Visions of a contagion began to spread through the minds of traders. So far this year, I believe the Turkish Lira has lost about 70% versus the dollar and Chinese stocks have lost about 15%. I mention this because nothing directly linked to this “war” has similarly affected US markets thus far. Still, leaders in Turkey and China haven’t given in to what really amounts to either small or rather reasonable US requests. This leads me to believe that the leaders need to save face or they’ve grown too accustomed to taking advantage of perceived US wealth – or both. In any case, stocks finished the week with mixed results. The Dow lost about a percent while the NASDAQ flirted with a new interim high.Chinese stocks may have been the only real winners on the week, as newspapers there did their very best to convince the public that China will win the ongoing Trump trade spat.
Away from all that, Treasuries behaved a little better than in weeks past. Both 10-year and 30-year auctions this week were deemed a success. Keep in mind that the Treasury market will face a host of festering challenges as we move forward, so I’m not going to declare victory on behalf of the Treasury Department quite yet. Among other things, corporate taxes are on the decline, which has helped the US budget deficit expand to $684 billion from $566 billion a year ago. Meanwhile pension funds in the upper brackets have been given temporary tax breaks for buying Treasuries. Anyway, returning to market action, the dollar rallied and managed to break through its upper bound at the 200–day moving average. This did not hurt the metals as much as one would expect, as gold lost only 0.16% to silver’s 0.84%. Oil continued to fall, curing itself of an overbought condition. If it can’t rally from here, $55/bbl. may be on the horizon.
Next week we’ll obviously get more on trade as it develops. More importantly, we’ll start to get some clues as to where the US economy is heading (via the economic data), as we head into the second half of this year. I don’t expect things to collapse immediately, but we should begin to see some marginal deterioration given the relative positioning of rates and the tapering away from tropical storm spending that we’ve had since November of last year. It will be even more interesting to see how short rates behave in that environment. I suspect they will remain stubbornly high relative to economic output, which will begin to discredit the Fed and its policies – as has been the case for other central banks around the world (i.e., BoJ, ECB, and PBoC).
VP Investment Management