So now we have a trade situation that is going off the rails as the side effects multiply due to the ramping up of the use of tariffs and we are only further apart from any resolution with the Chinese. The policy of using tariffs as a tool to address our legitimate beefs with the Chinese has failed miserably. We are approaching a year and a half when tariffs on washing machines and solar panels were first implemented and to what gain with all of this? If the administration was trying to calm things by sending Peter Navarro on Fox Sunday, he only made it worse. The selloff in the Chinese yuan now creates a whole new set of issues and while capital flight is now a real concern in China, and certainly for Hong Kong, we all lose by what is going on.
“Where have you gone Joe DiMaggio (economic logic), our nation turns its lonely eyes to you, woo, woo woo. What’s that you say Mrs. Robinson, Joltin’ Joe (economic logic) has left and gone away, hey, hey, hey.”
And if you think Fed rate cuts are going to somehow cushion this, please reassess as they won’t. The Fed is now irrelevant in terms of their ability to lift economic growth and markets I believe. If anything, if the Fed goes down the path of the ECB and BoJ, it will only make it worse. Thus, after only helping to inflate P/E multiples I’ll argue that the stock market from here will NOT be trading off what the Fed is going to do next, it will be all about where the economic fundamentals go from here. Good news will be good news, bad news will be bad news. You certainly are aware where the Nikkei is today versus where it was in 1989 after all the BoJ easing. Do you know that the Euro STOXX 600 is below where it was in 2000 even after all the ECB monetary madness?
I’ll repeat again my belief that owning some gold and silver is the right positioning to have under the current circumstances.
Thanks to the Hong Kong protests along with the China slowdown, the Markit Hong Kong July PMI fell further below 50 to 43.8 from 47.9. That’s a 10 yr low and Markit said “The rate of decline in both new orders and business activity was the steepest for over a decade, reflecting worsening demand conditions brought on by an ongoing US-China trade war and an escalation in largescale political protests in Hong Kong.” The Hang Seng fell almost 3%. Capital flight is the biggest worry right now with everything going on in Hong Kong and remember they have the most inflated residential real estate market in the world.
HONG KONG PMI
China’s July private sector focused Caixin services PMI fell slightly to 51.6 from 52 where no change was expected and that is a 5 month low. The services side continues to outperform the manufacturing and industrial part of the economy where the same can be said most everywhere. The Shanghai comp fell almost 2% while the H shares were lower by 2.6%.
Singapore’s July PMI rose a touch to 51 from 50.6 while Japan’s services PMI fell to 51.8 from 51.9. For Singapore, business expectations still fell to the lowest since early 2017. For Japan, Markit said “there were some signs that the underlying services economy was beginning to lose momentum, with employment and new business growth both easing, while optimism moderated as some firms were concerned that the looming consumption tax hike could impact demand.” Japanese business also now has to deal with rising tensions with South Korea.
The July Eurozone services PMI was revised a bit lower to 53.2 from the first print of 53.3 and which compares to 53.6 in June and 52.9 in May. Italy and France saw an uptick in services but was offset by declines in Germany and Spain m/o/m. Again, the service sector is outperforming but Markit said “there are signs that the scale of the manufacturing downturn is starting to overwhelm…The main source of expansion currently appears to be the consumer, in turn buoyed by the relative strength of the labor market. However, with the July survey indicating the weakest jobs gains in over 3 years, there are signs that this growth engine is also losing impetus, and adding another headwind to the economy for the coming months.” This risk of services getting infected by the weakness in manufacturing and then resulting in a slowdown in hiring is also the biggest risk to the US economy.
The euro is higher though as the dollar strength against the yuan is not universal against other currencies. The Swiss Franc is also notably rallying vs the dollar along with the yen.
The UK services PMI for July did improve to 51.4 from 50.2 and that was better than the forecast of 50.3. Consumer spending here too was the main catalyst for the gain but Markit still said “Even growth in the service sector remains worringly subdued, constrained by a marked fall in business activity, where the rate of decline in July has been exceeded only once in the past 10 years.” The pound is little changed in response to the beat as Brexit remains the largest influence.