Financial Review

All About the Face

…Stacks rally on the open, then lose steam. US-China agree to cease fire in trade war. Check back in 90 days. OPEC considers production cuts. Yield curve flattens. France burns. Markets close Wednesday to honor Bush.

Financial Review by Sinclair Noe for 12-03-2018

DOW + 287 = 25,826
SPX + 30 = 2790
NAS + 110 = 7441
RUT + 15 = 1548
10 Y – .02 = 2.99%
OIL + 2.16 = 53.06
GOLD + 8.20 = 1231.30

 

The major stock indices open with a strong rally lost steam through the session. The Dow started the day with more than 500 points to the upside. The Dow and S&P 500 closed above their 50-day moving averages. The Nasdaq ended just below its 50-day average. That should be considered a good sign for the new stock market uptrend. The energy sector was the strongest, with SPDR Energy ETF (XLE) up 2.2%. The price of U.S. crude oil rose 4%. In a strong day for technology stocks, semiconductors shined. The Philadelphia semiconductor index surged 2.7% to the highest level since Oct. 17.

 

At the G20 summit Saturday, Trump and Chinese President Xi Jinping agreed to halt new tariffs that were to be implemented on Jan. 1 for 90-days while trade talks continue. Also, at the G20, Russian President Putin said that he and Saudi Crown Prince Mohammed bin Salman agreed to extend their agreement to curb output to help boost oil prices. Russia will meet with OPEC members at the cartel’s meeting in Vienna on Thursday.

 

Let’s start with the US-China compromise at the G20 summit. Investors got as good an outcome as they could have expected from this weekend’s dinner meeting between Trump and Chinese counterpart Xi Jinping. The U.S. backed off on its threats to boost the level of tariffs already in place on China-made goods from 10 to 25 percent on Jan. 1. Trump also held off on initiating fresh tariffs on another $267 billion in Chinese goods during a 90-day cease-fire agreement set to go into effect at the start of 2019. Beijing agreed to make a “very substantial” purchase of many U.S. goods, including agriculture products. The deal reached this weekend did not end the trade war with China; there are still tariffs in place. The agreement was basically an opportunity, a 90-day window for an opportunity to end the trade war, but there are still challenges. The devil is always in the detail, and this weekend’s dinner was short on details. Nothing beyond their official statements exists and deep divisions remain. Given the substantial number of issues still left to be resolved — from IP theft to Chinese support for state-controlled corporations — a 90-day window is far too short to reach a broad agreement.

 

Negotiations are set to kick off in mid-December, when Chinese officials come to the US to meet with US Trade Representative Robert Lighthizer. But while the discussions are encouraging, there is a real chance the tariffs on the $200 billion worth of goods get a boost to 25% come March. The Xi-Trump dinner has clearly improved the tone of the U.S.-China relationship for the time being, and we would expect an initial positive market reaction, the ‘pause’ prolongs the period of uncertainty around the eventual structure of trade relations between the two countries, but it does little more than kick the can down the road. Trade is not the biggest factor for the US.  Rather, it is Washington’s longstanding concerns about China’s technological development which could become a military threat, including in cyber warfare. But trying to stop that pursuit rather than maintaining influence through cooperation — in areas such as space, supercomputers and transportation — is actually having the opposite effect. Such pressure is forcing China to develop their technology faster. It will push China to develop in a way that is ultimately against American interests. In the economic sphere, China will try to increase the international use of its currency, the yuan. The yuan will increasingly be used to settle Chinese trade transactions, including with countries such as Russia and Iran.

 

If you were China, would you rather face a deadline for trade negotiations with Trump now, or a few months from now?  It’s an easy question to answer. Trump is in the waning days of Republican control of Congress. The ability to pass laws with no support from opposition Democrats—which is how the Trump tax cuts passed in 2017—will end within a month.

 

As the 10-year Treasury note has moved lower recently, the 2-year yield has been fairly steady, and the two are getting closer together—or flattening. A flattening yield spread is seen as a warning on the economy, and when yields invert, it is a sign of recession. With the 10-year yield dropping under 3%, the spread between the 2-year and the 10-year is a mere 16 basis points.

 

A gauge of U.S. manufacturing rebounded in November as new orders picked up and companies added workers. The Institute for Supply Management survey of manufacturing business conditions increased to 59.3 from 57.7.

 

Amazon briefly surpassed Apple as the world’s most valuable-publicly traded company, days after Microsoft dethroned the long-time leader Apple. Amazon rose as much as 4.7%, giving it a market capitalization of $865 billion ahead of Apple’s $864.8 billion valuation. Apple reclaimed its crown with a market value $846.4 billion — after Amazon’s market cap dropped to $827.1 billion as of 3:00 p.m. ET. Microsoft, whose market capitalization last Monday surpassed Apple’s for the first time in eight years, had a market value of $844.9 billion.

 

The U.S. Supreme Court said it would decline to hear a challenge to the Trump administration’s proposed border wall brought by environmental groups who say construction could threaten endangered animals and violate environmental laws.

 

A critical part of the Affordable Care Act’s design is that people can use the law’s financial assistance only to purchase insurance plans that comply with the law’s requirements for preexisting conditions and benefits. The Trump administration, under new guidance released last week, would allow states to dissolve that link. The new guidance covered 1332 waivers, the program established by the health care law that allows states to pursue their own health care programs as long as they meet certain requirements. this latest revision demolishes that key guardrail embedded in Obamacare.

 

Under the new guidance, states could allow people to use the ACA’s premium subsidies to purchase plans that don’t satisfy the law’s other provisions. So plans that discriminate against people with preexisting conditions or that offer skimpier benefits — practices Obamacare tried to end — could suddenly benefit from its generous subsidies. It’s important to note that nothing is going to happen unless states decide to pursue a waiver. All the Trump administration has actually done is crack open this door. States would have to choose to walk through it, and it is not a popular idea. If states do opt for the non-compliant alternatives, the likely outcome is premiums will go up for the Obamacare plans, as healthier people leave them for the cheaper but improved non-compliant insurance. Right now, people are protected from premium increases because their assistance rises as much as it must to keep coverage affordable. But if there were suddenly a cap on federal assistance, people would start to feel the premium increases that were precipitated by allowing people to use subsidies for non-compliant plans. Again, whether this happens or not will depend on the states.

 

France is burning; widespread protests and riots that have led to violent clashes with police. The protests began around November 17, when French drivers sporting yellow vests led a demonstration of 280,000 people across the country to push back against rising taxes on gas and diesel fuel. French President Emmanuel Macron announced the new gas tax earlier this year, as part of a broader plan to minimize France’s reliance on fossil fuels.

 

The tax will increase the price of fuel by about 30 cents per gallon and will continue to rise over the next few years. Gas already costs over $7 per gallon in France. The protest movement has blockaded streets and highways, burned cars, and brawled with police in response to the price hike. In recent days, though, the protesters have begun directing their anger at the state of France’s economy as well, and at Macron’s leadership of the country in general. Saturday saw one of the worst days of unrest yet, with the third large-scale riots in Paris described by some as “urban warfare” and “the worst riots in a generation.” Around 133 people were injured — including law enforcement officials — and about 412 were arrested. France’s Interior Ministry said it had to deploy 37,000 police officers, 30,000 firefighters, and 30,000 gendarmes, members of the ministry’s armed forces, to contend with the protest. But the movement has spread to many parts of the country.

 

The protests have shown no signs of stopping — in fact, they’re escalating. The French government says around 136,000 people participated in a nationwide protest on Sunday. And on Monday, students in 100 schools across the country demonstrated against educational reform. Macron will be in protesters’ crosshairs for quite some time, especially since he has given no indication he will bend to their demands. It’s therefore possible that some of his political competitors — like the far-right politician Marine Le Pen — can take advantage of the public’s disaffection and become the premier alternative to Macron.

 

U.S. stock markets will close Wednesday, Dec. 5, to honor former President George H. W. Bush, who died Friday night at age 94. So will other U.S. financial markets. Wednesday has been declared a day of public mourning. The NYSE will close for all of Wednesday. So will the Nasdaq. The bond market will be closed. CME Group will close U.S. futures and options markets as well, with overnight futures trading ending at 9:30 a.m. ET Wednesday morning.

 

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