The SPY and Nasdaq finished down greater than 2% today amidst an escalation of the trade war between the US and China. Trade war is causing the global equity markets to fall on worries that the US and Chinese governments will continue to raise the stakes in a situation that can cause both economies to contract. The CNY Chinese Yuan depreciated to below a critical 1 dollar to 7 Renminbi level. One of a few weapons China can use in trade war is their currency via “manipulative devaluation”. Devaluation allows the Chinese to make their goods more attractive to buyers in dollars because it allows purchasers to buy more goods. At the same time this is dangerous because it can cause capital outflows from the Chinese economy as their currency weakens and investors seek higher rates of interest else where. This is apparent in the US treasury market as the 10 year fell to 1.80% today from 2.06% that we traded at late last week.
Companies in the semi conductor and electronic manufacturing fields such as Apple and Micron are anticipating longer term trade tensions to make their Chinese manufacturing less attractive and are beginning to move facilities to other south eastern Asian countries to circumvent tariffs.
Not to mention, the Federal Reserve can only do so much. Accommodating monetary policy is worthless and the market has already priced in 2 more cuts by the end of this year. In other words, if the Federal Reserve doesn’t cut interest rates the market will sell off violently. The “risk on” mood for equities is over and with the move below 3000 on the S&P 500 a risk off mood is taking hold.
The best game in town is fixed income with longer duration, as investors are gaining market value while interest rate expectations race towards 0%. The TLT 20 year treasury ETF is on a tear up nearly 15.74% year to date. Duration is allowing fixed income investors to get equity returns, with minimal risk as Central Banking policy continues the experiment with stimulus and QE.