The Next Correction Could Be Underway
A major trade war escalation... The White House threatens new tariffs… China strikes back… The yuan plunges the most it has since 2015… The next correction could be underway...
Regular Digest readers know we've been keeping a skeptical eye on the on-again, off-again trade war between the U.S. and China...
In short, while we've hoped that "cooler heads" would prevail, we've long predicted that a quick and lasting resolution was unlikely.
That remained the case when the mainstream media was trumpeting a "cease-fire" following the Group of 20 ("G-20") summit in late June. As we wrote in the July 1 Digest...
The move appears to be little more than a temporary truce to allow the U.S. and China to restart trade talks for the third time...
While the U.S. will refrain from enacting new tariffs on Chinese imports for now, the existing tariffs will continue to weigh on the economy. Meanwhile, the two countries reportedly remain as far apart on an actual deal as they did in May, when talks last broke down.
We agree [that] an amicable trade resolution is in everyone's best interest. But we're not holding our breath just yet.
So we weren't surprised when the trade war suddenly escalated again late last week...
It all began on Thursday, when U.S. President Donald Trump unexpectedly announced a new round of tariffs. Citing a lack of progress in the latest round of trade talks, Trump said the U.S. would impose 10% tariffs on an additional $300 billion of Chinese imports effective September 1.
As has been the case previously, the Chinese government quickly denounced the move. From a Bloomberg report on Friday...
Beijing pledged... to respond if the U.S. insists on adding extra tariffs to the remainder of Chinese imports.
"If the U.S. is going to implement the additional tariffs, China will have to take necessary countermeasures," Foreign Ministry spokeswoman Hua Chunying said at a regular briefing in Beijing on Friday...
"China won't accept any maximum pressure, threat, or blackmailing, and won't compromise at all on major principle matters," Hua said.
As Bloomberg noted, the Chinese government didn't elaborate on exactly what those 'countermeasures' might be...
But we didn't have to wait long to find out. This morning, China responded with two big moves of its own...
First, the Chinese government announced that its state-owned companies would cease imports of U.S. agricultural products indefinitely. This isn't a surprise... China's buying of American farm goods has been one of the major points of contention recently. And it's one of the few issues where China still has significant leverage over the U.S.
Second, China's central bank allowed its currency, the yuan, to plunge to its weakest level versus the dollar in more than a decade. As the Wall Street Journal reported...
China's currency broke through the psychologically important level of 7 yuan to the dollar...
The yuan slid as much as 1.9% to a record offshore low of 7.1087 to the dollar in Hong Kong on Monday, according to data from Refinitiv. That put it on course for the biggest single-day loss since August 2015, when Beijing allowed a sudden depreciation of the currency. China has let the yuan trade offshore, in locations such as Hong Kong, since 2010.
In mainland China, the yuan also weakened beyond the 7 level – which policy makers in recent years have defended at various points – for the first time since 2008.
The Chinese central bank denied that the move was meant as retaliation...
But that certainly appears to be the case. As the WSJ noted, the Chinese government has acted to keep the yuan above the key 7 level for years. It's unlikely the central bank would have the authority to reverse this policy without the permission – or direction – of top government officials.
Meanwhile, a weaker yuan will make Chinese imports cheaper for U.S. consumers, at least partially offsetting the effects of tariffs.
Of course, this move is not without risks of its own... If the Chinese government allows the yuan to fall too far, too quickly, it could spook the markets and cause capital to flee the country.
Longtime readers may recall that this is exactly what happened three years ago, when a surprise yuan devaluation in August 2015 helped trigger a global panic that fall.
Now, we're not predicting a repeat of that scenario this summer...
But as we've discussed in detail over the past several weeks, there are plenty of reasons for caution today. And the market was clearly not pleased by this news...
All three major U.S. stock market indexes suffered their worst days of the year today. Both the Dow Jones Industrials and the benchmark S&P 500 index fell nearly 3%, while tech-heavy Nasdaq lost more than 3.5%.
The odds of at least a short-term pullback are rising. And today's market action suggests it could already be underway.
New 52-week highs (as of 8/2/19): Corteva (CTVA), Western Asset Emerging Markets Debt Fund (EMD), Invesco Value Municipal Income Trust (IIM), iShares iBoxx Investment Grade Corporate Bond Fund (LQD), Nestlé (NSRGY), Vanguard Inflation-Protected Securities Fund (VIPSX), and Wells Fargo – Series W (WFC-PW).
In today's mailbag, an unusual "thank you" to Porter... and a question about Matt McCall's Friday Digest. As always, send your comments and questions to feedback@stansberryresearch.com.
"Thank you. I'll make this short... I've been a Stansberry subscriber since the mid-2000s. Porter predicted the demise of GM, Fannie Mae, Freddie Mac and others. He's also been picking on Hertz for a long time. Now, I missed all those opportunities, but I was driving with my wife and son through Estero, Florida, and fell in love with this bucolic but expensive town. Guess what new, big headquarters is based there? Hertz. Now, I'm just about to sell my expensive south Florida home and was looking for a slower, safer place with a lot of upside in real estate prices. Betting that Hertz will go bankrupt within a few years will give us a shot at some nice homes for a lower price while our son goes to a good, public school. All we have to do is sit on some dry powder, rent a two bedroom apartment and give it some time. Thanks for helping to set-up my own, personal short..." – Paid-up subscriber Chad E.
"I would be interested in investing in the Chinese Biotech sector. Is Matt going to give some recommendations on which firm? And how is it possible to invest in them? I assume not all are foreign listed?" – Paid-up subscriber M.K.
"What is the ETF recommended?? It is not mentioned?" – Paid-up subscriber Wayne H.
Brill comment: Matt shared the name and ticker symbol of one of his favorite Chinese biotech companies – as well as a "one-click" Chinese biotech ETF – during his free 10X Summit last week. If you missed it, you can still access a full video replay for a couple more days. Click here to see it now.
Regards,
Justin Brill
Baltimore, Maryland
August 5, 2019