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MCF Weekly Capital Market Review - October 7th, 2019

Negotiators from China will arrive in Washington D.C. this week for another round of trade talks. The Chinese delegation will be led by Vice Premier Liu He (President Xi will not be present). The US is scheduled to raise tariffs from 25% to 30% for $250 billion of Chinese goods on October 15. Ahead of the meetings, Liu is already taking industrial policy and government subsidies off the negotiating table.[1] The prevention of forced technology transfers and intellectual property (IP) theft is a core demand from the Trump administration that must be included in any trade deal. China limiting the scope of possible concessions excluding a core US demand is not likely to improve chances of a trade deal.

The US Trade Representative estimates that Chinese IP theft costs American companies between $225 – $600 billion annually.[2] Ending “foreign trade abuses” was a key point for Trump’s 2016 campaign pledge.[3] If the past two years of the US-China trade war have told us anything, it’s that Trump is willing to stake his entire political career on seeing it through. China would welcome a change in administration no later than 2021 and is content to delay and extend the negotiating process. In the meantime, producers and consumers from both sides are stuck in the middle. Tariffs from both sides for all goods between the US and China are becoming the status quo, with no hints of changing anytime soon.

The World Trade Organization (WTO) ruled on a US request to tariff European goods as a result of an ongoing trade dispute from 2004 regarding illegal subsidies for European Airbus planes. If the WTO adopts the ruling, the US would be granted supranational approval to tariff $7.5 billion European goods. The EU could retaliate by early 2020 when the WTO decides retaliation rights against illegal subsidies for US Boeing planes.[4] The Trump administration has not shied away from trade disputes with China, Mexico, and many others. Europe could be the next target as this one serendipitously falls into his lap. Concerns for markets would be a Trump escalation targeting up to ~$487 billion[5] of total European goods imported to the US.

The PMI manufacturing index showed minimal growth. The ISM manufacturing and non-manufacturing indices showed a further slowing in growth, with exports down sharply for the past three months. Construction spending is down 1.9% year over year; although negative, it is still the most optimistic figure since April. Labor remains stable with the unemployment rate ticking down to 3.5% and the labor force participation rate holding steady at 63.2%. However, manufacturing jobs were a net loss and wage pressures remain subdued.[6]

This week will see multiple speeches from Fed Chair Powell along with the minutes from the last Fed meeting, CPI and PPI inflation measures, JOLTS job openings, and consumer sentiment.

INDEX RETURNS


[6] https://us.econoday.com/byweek.asp?cust=us

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by MCF), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from MCF.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  MCF is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the MCF’s current written disclosure statement discussing our advisory services and fees is available upon request. If you are an MCF client, please remember to contact MCF, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. Please click here to review our full disclosure.

REFLECTED INDICES

S&P Composite 1500® Index combines three leading indices, the S&P 500®, the S&P MidCap 400®, and the S&P SmallCap 600® to cover approximately 90% of the US market capitalization. It is designed for investors seeking to replicate the performance of the US equity market or benchmark against a representative universe of tradable stocks. Investors cannot invest in an index.

MSCI ACWI ex USA Index captures large and mid cap representation across 22 of 23 Developed Markets (DM) countries (excluding the US) and 23 Emerging Markets (EM) countries. With 1,859 constituents, the index covers approximately 85% of the global equity opportunity set outside the US. Investors cannot invest in an index.

Bloomberg Barclays Global Aggregate ex-USD Index is a measure of global investment grade debt from 24 local currency markets. This multi- currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. Investors cannot invest in an index.

Bloomberg Barclays High Yield Corporate Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Barclays EM country definition, are excluded. Investors cannot invest in an index.

S&P GSCI is a composite index of commodity sector returns which represents a broadly diversified, unleveraged, long-only position in commodity futures. The S&P GSCI is intended to provide exposure to broad-based commodities. Investors cannot invest in an index.

Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed- rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass- through), ABS and CMBS (agency and non-agency). Provided the necessary inclusion rules are met, US Aggregate eligible securities also contribute to the multi-currency Global Aggregate Index and the US universal Index, which includes high yield and emerging markets debt. The US Aggregate Index was created in 1986 with history backfilled to January 1, 1976. Investors cannot invest in an index.

Bloomberg Barclays 1-10 Year US Government Inflation-Linked Bond Index tracks the 1-10-year inflation protected sector of the United States Treasury market. Investors cannot invest in an index.

Bloomberg Barclays US Treasury 1-3 Year Index measures the performance of public obligations of the US Treasury with maturities of 1-3 years, including securities roll up to the US Aggregate, US Universal, and Global Aggregate Indices. Investors cannot invest in an index.

Bloomberg Barclays US Treasury Bellwethers 3 Month Index is an unmanaged index representing the on-the-run (most recently auctioned) US Treasury bill with 3 months’ maturity. Investors cannot invest in an index.