Uncertainty about where the U.S. – China trade/tech war could be headed for continuous to rule the markets.
Keeping in mind that the month of September is most of the time the worst month of the year for equities, nobody should be surprised that U.S. markets have started the first trading day of the month of September in the “red” because of wide-spread risk-eversion.
In this context, comments of the Swiss bank UBS are noteworthy and could be of interest for investors. The bank said in a note to its clients and as reported by the South China Morning Post that the trade war is impacting the global economy and that despite headlines that go back and forth, two facts have become more and clearer over time.
- First, the trend is toward escalation, not de-escalation.
- Second, the cost of the uncertainty accumulates as time goes on without resolution, weighing on both the domestic and global economies.
The Swiss bank also says it removed its overweight rating for global equities versus high-grade bonds, while also initiating an underweight rating for emerging market stocks versus high-grade bonds. The bank said emerging market firms are more exposed to heightened market volatility, a slowing global economy, and heightened trade tensions, the South China Morning Post said.
In the meantime, on Sunday another round of bilateral US-China import tariffs came into force. The U.S. implemented 15 percent tariffs on an additional $110 billion of imports from China while the second part is scheduled for coming into force on December 15.
China has also started imposing 5 percent to 10 percent import tariffs on an additional $75 billion of U.S. goods, which for the very first time include a 5 percent tariff on U.S. crude oil.
These latest round of U.S. and Chinese tariffs confirm further escalation of the U.S. – China trade/tech war that will, without any doubt, at least that’s my personal opinion, further weaken economic growth globally and of course in both countries notwithstanding that the U.S. economy remains, till now at least, by far the less fragile economy.
Besides all that, the U.S. and China have not formally announced “yet” when they will meet again for another round of talks.
We also got the publications of two very important PMI Manufacturing reports for the month of August.
Firstly, we got the IHS Markit Eurozone Manufacturing PMI for the month of August that came in once gain another weak at 47 (below 50 is contraction area). Chris Williamson, Chief Business Economist at IHS Markit commented: August’s manufacturing PMI was the second-lowest since early 2013, and a marked deterioration in optimism about the year ahead suggests companies are expecting worse to come. The deteriorating manufacturing conditions mean the goods-producing sector is likely to act as an increased drag on Eurozone economic growth in the third quarter.
Secondly, the Institute for Supply Management released, also today, its U.S. Manufacturing ISM Report On Business PMI for August that printed 49.1, which means in contraction zone for the Manufacturing sector, and down from 51.2 in the previous month and missing market expectations of 51.1. The latest reading points to the first month of contraction in the manufacturing sector since January 2016 as new orders and employment declined amid concern about US-China trade/tech war.
- New Orders, Production, and Employment Contracting
- Supplier Deliveries Slowing at a Slower Rate
- Backlog Contracting
- Raw Materials Inventories Contracting
- Customers' Inventories Too Low
- Prices Decreasing
- Exports and Imports Contracting
Unfortunately, both PMIs don’t seem to bode well for the U.S. economy. Of course these data will have to be confirmed over the coming months.
Because of all that, various rate cuts by the Fed are now fully in the cards.
In my opinion, I still think that there is a big probability that things could get seriously worse before getting better again.
I remain favoring U.S. Treasuries and the U.S. dollar, which I expect to continue moving higher as long as the uncertainties caused by the U.S. - China trade/tech war remain in place.
The day there is a definitive agreement/solution for the U.S. - China trade/tech war, then there is a high probability we’ll see the dollar moving “substantially” lower…
Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.
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