Investment Commentary – August 6, 2019

Year to Date Market Indices as of Market Close Aug 6, 2019
• Dow 26,029 (11.58%)
• S&P 2,881 (14.96%)
• NASDAQ 7,833 (18.05%)
• Gold $1,506 (17.19%)
• OIL $52.76 (15.24%)
• Barclay Bond Aggregate (7.70%)
• All World Index (12.32%)
• Fed Funds Rate 2.25 (-0.25 rate cut 7/31/19)
• US Real GDP Growth 2.1 Q2/2019 (Down from 3.1 in Q1)

Dow bounces back from worst day of 2019 as S&P 500 ends 6-day losing streak

Information technology and communication services stocks lead the market higher

U.S. stocks finally rallied Tuesday after six days of declines and following the biggest losing day so far this year on Monday.

Stocks with business in China such as Apple, Micron Technology and Nike that were big losers on Monday led the gains Tuesday.

Investors took fright Monday as China allowed the yuan to slump to its lowest level in a decade after President Donald Trump’s threat last Thursday to impose 10% tariffs against an additional $300 billion of imported Chinese goods, effective Sept. 1.

How did benchmarks perform?

The Dow Jones Industrial Average DJIA, +1.21% rose 311.78 points, or 1.2%, to end at 26,029.52, while the S&P 500 index SPX, +1.30% climbed 37.03 points, or 1.3%, to close at 2.881.77, powered by a rally by the information technology XLK, -1.47% and communication services XLC, +1.45% sectors, while the Nasdaq Composite Index COMP, +1.39% surged 107.23 points, or 1.4%, to finish at 7,833.27.

On Monday, stocks had their worst day of the year, with the Dow shedding more than 767 points. The Dow ended the day down 2.9%, at 25,717.74, while the S&P 500 declined 87.31 points, or 3%, to close at 2,844.74. The Nasdaq Composite shed 278.03 points to finish at 7,726.04, a decline of 3.5%.

Traders were encouraged by China’s central bank moving to restrain the fall in its currency with a fix Tuesday at 6.9683 yuan. A breach of the 7-to-the dollar level on Monday, interpreted by some as an intentional weakening of its currency, helped to ignite a global stock market selloff and slump in bond yields.

“A more market-friendly China fix provided the first signal that the [People’s Bank of China] is having a second thought about weaponizing the yuan,” said Stephen Innes of VM Markets in Singapore. “However, the fix is ambiguous enough to keep two-sided interest alive while still conveying a message to U.S. trade hawks that in no uncertain terms will China be a pushover if trade talks ever resume.”

China designated a ‘currency manipulator,’ here’s what that means

The U.S. Treasury Department on Monday – with the backing of President Trump Opens a New Window. – officially labeled China Opens a New Window. a currency manipulator.

Secretary Steven Mnuchin determined that China is in fact unfairly influencing its currency to “gain unfair competitive advantage in international trade.” But what exactly does the designation mean?

It will officially kick off a process, whereby the Treasury Department will research and issue a report to the International Monetary Fund (IMF) about the situation.

The U.S. is supposed to begin negotiations with China regarding its currency manipulation – which can either be bilateral or mediated by the IMF. The Treasury on Monday conveyed its intent to go through the IMF.

Sources told FOX Business’ Edward Lawrence that in order for the U.S. to remove China from its currency manipulator list, the administration wants Beijing to lower its trade imbalance with the U.S., increase transparency regarding movements in its currency exchange rate and increase transparency about China’s reserve management operations.

The U.S. has been considering designating China as a currency manipulator for years. It had previously done so between 1992 and 1994.

Monday’s decision comes amid an ongoing trade war between the world’s two largest economies – as Beijing let the yuan fall to a more than ten-year low against the U.S. dollar after Trump announced his intent to ramp up tariffs on Chinese goods.

As of Sept. 1, the U.S. will impose a 10 percent levy on the remaining $300 billion worth of goods entering the country from China.

Despite the escalation in the trade battle, the two country’s delegations are expected to meet in Washington next month.

Around the Market

Volatility returns: News on trade tensions and interest rates overshadowed mostly solid earnings reports and jobs numbers, and stock indexes retreated sharply from the prior week’s record highs. The indexes dropped around 3%, interrupting a recent run of positive momentum as stocks returned to their levels of late June.

Tariff escalation: Hopes that the United States and China were on the verge of a breakthrough on trade issues evaporated as high-level talks in Shanghai failed to produce an agreement and President Trump on Thursday escalated his tariff battle. The new 10% tariff affects $300 billion in Chinese goods, many of them consumer products, and takes effect in September.

Not dovish enough?: As expected, the U.S. Federal Reserve cut interest rates for the first time since late 2008, but Chairman Jerome Powell’s reluctance to offer positive guidance on any further rate cuts got a chilly response from equity investors. Stock indexes fell around 1% after Wednesday’s quarter-point rate cut.

July high: July extended a strong year-to-date run for the major U.S. stock indexes, with the S&P 500 setting record highs en route to a 1.4% total return for the month. The index’s year-to-date return through July was 20.2%—the best seven-month start to a year since 1997, according to S&P Dow Jones Indices.

The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investments.