Weekly Market Review

Trump continues to have China in his crosshairs, raising the tariff rate from 25% to 30% on $250 billion of Chinese goods starting October 1. This is in addition to a 15% tariff on the other $300 billion piecemealed on September 1 and December 15.[1] Despite rhetoric from Chinese officials that they would not use Yuan devaluation as a tool in the trade war, the Yuan closed at 7.1553, a depreciation of approximately 3% since August 5.[2] China risks price instability and supranational scrutiny if they really are manipulating their currency. According to Trump, talks with China are still planned for September, but the exact date is still unknown.

Last week, there was very little released in terms of economic indicators. Even geo-political events, at least those with large potential for market impact, were quiet. Trump provided a vague “Doing great with China”[1] update on Wednesday. Then came Friday with China announcing retaliatory tariffs on $75 billion of US goods in two rounds on September 1 and December 15, matching the implementation of the latest US combined rounds of $300 billion in tariffs on Chinese goods.

News of the yield curve inversion vanished as quickly as it appeared with the two-year yield falling more than the ten-year to reverse the inversion.[1] Equity markets stabilized after the large drop on Wednesday and rallied back some of the losses. It was still a negative week, but it has not morphed into a sustained downturn pushing into bear territory.

Tuesday’s rally was the result of a partial Trump reprieve, announcing that some Chinese products targeted in the latest round of tariffs would be excluded or delayed until December 15. Negotiators from both sides agreed to talk in two weeks.[1] The positive news quickly lost steam Wednesday due to a slew of economic data. The market selloff Wednesday was primarily a reaction to concerns of slowing global growth.

Trade war tensions continued to take a toll on markets last week with equities finishing in the red, even more so for international equities. Gold continued its climb, breaking the $1,500-mark last week for a 1-year return of over 23% and reaching a 6-year high.

As largely anticipated, on Wednesday the Fed cited muted inflation pressures and global developments (weaker global growth and bubbling trade disputes) as reasons to cut interest rates 0.25%.[1] The rest of the release paints a pretty rosy picture of the US economy with strong labor markets and moderate economic growth. So why cut rates? Under Greenspan, The Fed responded similarly in 1995-1996 and in 1998, with what now is known as an “insurance” cut.[2] An insurance cut is used as a cushion to protect the economy against potential weakness, rather than the traditional view of responding to real economic weakness.