Weekly Market Commentary – August 12, 2019

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Like some employees, the stock market had a great week, if you don’t count Monday. After falling nearly 3% on Monday, the market steadied as the back-and-forth between China and the U.S. calmed. On balance, markets reacted negatively to the news that China allowed its currency to weaken against the dollar. The S&P 500 dropped 0.4%. Global stocks also declined as the MSCI ACWI slid 0.8%. Bonds rallied on the ongoing weakness in the global economy. The Bloomberg BarCap Aggregate Bond Index rose 0.6%. However, despite the recent market swings, the S&P 500 is only 3.5% below an all-time high.

Key Points for the Week

  • China responded to U.S. tariffs by allowing the yuan to decline against the dollar.
  • Markets dropped sharply on the escalated response, but they rallied as tensions calmed.
  • The global economy continues weaken as British GDP unexpectedly declined last week.


How much is a dollar worth?

The trade war between the U.S. and China widened this week as the Chinese allowed their currency to depreciate against the dollar. As the accompanying chart shows, it had taken about 6.9 yuan to purchase $1. It now requires more than seven yuan. The move was a response to U.S. plans to put tariffs on an additional set of Chinese goods. Tariffs make goods more expensive, but a cheaper currency counteracts the effect by lowering the cost of Chinese goods when priced in dollars.

The change doesn’t seem like a big deal, but investor reaction to China’s announcement pushed the market lower by nearly 3%. The move was a shot across the bow, a reminder from China that it has tools to combat tariffs imposed by the U.S.

The move caught everyone’s attention, but the Chinese set the exchange rate so that the yuan would buy more dollars than expected. Markets rallied on Tuesday and almost finished positive for the week.

While trade negotiators around the world fight for advantages in revised deals, the global economy continues to struggle. British GDP unexpectedly contracted last week, and Canadian employment data was weaker than expected. Most economic data points are telling economists and investors the healthy economy of two years ago is being sustained by strong consumer spending but weakened by lack of business investment. Whether its uncertainty created by the U.S. and China, Brexit, or Korea and Japan, businesses are less likely to invest in expansion when export rules are so uncertain.

Retail sales data this week will demonstrate if consumers in the U.S. and China continue to support the global economy with strong retail growth or if the consumer is stepping back slightly, too. Investors would welcome an end to the steady escalation of responses between the U.S. and China, and strong economic data would likely be welcome news, too.


Fun Story

Monetary Policy and Lessons from the Drug Cartels

Negative interest rates can still be a better investment than keeping money in cash. The link above leads to a podcast discussion with a Federal Reserve official who points out that cash, on its own, can get stolen, lost, or used to fuel the 1998 Tahoe your son inherited. During its operation, the Medellin cartel used to bury large quantities of cash in the jungle. They assumed 10% of the money would be unusable. They would have done much better in a German bank account earning negative interest. Maybe rates can go lower than we thought.


 

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