MCF Weekly Capital Market Review - September 3rd, 2019
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. 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. 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.
On Wednesday, UK Prime Minister Boris Johnson successfully petitioned the Queen to prorogate the current session of Parliament., ending the current Parliamentary session by September 12 and starting a new session on October 14. Both debating and voting will be officially suspended, along with all opposition attempts to delay again or overturn the Brexit referendum. The UK was originally scheduled to leave the EU March 29, 2019. This deadline has already been extended twice and PM Johnson’s political career rests on meeting the promised October 31 deadline. It’s a bold move that appeals to Brexiteers (“leave” supporters) with equal abhorrence to Brexit Remainers. It adds pressure to both Remainers and the EU to capitulate and offer an agreement more acceptable to Brexiteers, but it could also backfire by uniting a fragmented coalition of opposition.
This means Brexit is more likely to happen as scheduled, and without a withdrawal agreement. In this case, the UK would leave all EU institutions, including the customs union, and instead follow World Trade Organization (WTO) trading terms. The EU refuses to renegotiate the currently offered withdrawal agreement, which leaves too much EU sovereignty over the UK for Brexiteers to stomach; it has already been rejected three times by the UK Parliament. Brexiteers want an agreement that adheres to the spirit of the referendum (e.g. removing all or vast majority of EU sovereignty) v. Brexit Remainers wanting a severely neutered version of it (or overturning it altogether). The potential Brexit outcome continues to create uncertainty for cross-border EU businesses as they attempt to grapple with future trade rules.
Consumer confidence delivered another high reading, almost matching July’s strong showing, reflecting consumers that are either oblivious to the trade wars or optimistic for a trade deal. Durable goods orders were mixed while second quarter GDP met consensus estimates of 2%. Consumer spending was positive, meeting the high end of estimates. PCE came in at 1.6%, still short of the Fed’s 2% inflation target.
This week will see PMI/ISM manufacturing reports, several employment reports, and a speech by J. Powell on Friday.
IMPORTANT DISCLOSURE INFORMATION
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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.
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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.