US Stocks Still Improving But Could Suffer as Trade War Escalates

Central banks from around the world have issued somewhat dramatic rate cuts, mostly a result of concern over global growth.  For example, New Zealand, Thailand, and India all cut their interest rates, citing this very thing as their reason.  

Essentially, analysts could advise the net result of this indicates a full collapse in global interest rates, both at the long end and short end of curves that easily outstrip overall global activity deceleration.  In the past, we are more accustomed to seeing the opposite: historically, central banks are typically quite slow to react to these sharp deteriorations in corporate earnings and then only getting involved when the employment markets start show a pending impact on employment.

What we are seeing in this case, though, is that central banks and fixed income markets seem to be trapped in a feedback cycle in which lower yields primarily less strict policies (and vice versa).  Conclusively, this tells us that the underlying economic activity is actually much more difficult to ascertain. 

Fortunately, in the United States, stronger data coming out of China are helping to stabilize things for Wall Street.  China reported that exports rose 3.3 percent, on a year-over-year basis last month. This beats some economist expectations of 2 percent.  

Sure enough, the data helped the Asian market to quickly escalate, nearly overnight.  For example, the Shanghai Composite jumped almost one percent.  The Nikkei 225 index grew 0.4 percent. 

At the same time, investors are still cautious and monitoring the yuan.  Late in the week, China’s central bank set its official reference rate for the local national currency at 7.0039 yuan per USD.  That is the global currency’s weakest level in more than a decade (April 21, 2008).  China had set the currency’s midpoint higher than $7 USD earlier in the week so this decline is notably disappointing; sure enough it initiated the biggest sell-off on Wall Street, for the year so far.