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Weekly Relative Value
Published at the top of each week by Balance Sheet Solutions, Weekly Relative Value tracks market and economic trends, analyzes key releases and watches ongoing political developments.
Commentary prepared by Balance Sheet Solutions, LLC, a wholly owned CUSO of Alloya Corporate Federal Credit Union. Balance Sheet Solutions is a leading broker/dealer, investment advisor and ALM risk management consultant to credit unions.
Friday, July 20, 2018 at 8:00 a.m. CST
Commentary prepared by Tom Slefinger, SVP, Director of Institutional Fixed Income Sales, Registered Representative of ISI*, Balance Sheet Solutions
|2s/5s Tsy Spread||0.15||+0.01|
|2s/10s Tsy Spread||0.26||+0.01|
|2s/30s Tsy Spread||0.39||+0.02|
Today's Market Commentary
Recap – With the trade situation still as unpredictable as can be, uncertainty is plaguing markets. Traders are focusing squarely on China, and the country’s currency in particular; the yuan tumbled in early trading after the People’s Bank of China fixed it sharply lower to 6.7671. The yuan is on course to lose -1.54% this week, having weakened by an average of 0.88% in each of the five weeks prior to this. Since late March, the yuan has slumped 8% versus the U.S. dollar. Thus, markets believe China is directly “weaponizing” the yuan to fight back at the U.S. This, of course, suggests that there is no evidence of de-escalation on the trade war front.
Meanwhile, this morning on CNBC, President Donald Trump stated that he is ready to place tariffs on all $505 billion worth of Chinese goods coming into the U.S. “I'm not doing this for politics – I’m doing this to do the right thing for our country.” After all, trade wars are “easy to win.” Right, Mr. President?
Why It Matters – If a currency war breaks out, it may paint an ugly picture for assets further down the line. To wit, after a similar devaluation in 2015, the S&P 500 lost -12.24% and the Nasdaq dropped -15.29%. West Texas Intermediate oil was also down -39.16% while metals and commodities lost -13.74% and -18.83%, respectively. The Shanghai Composite and Hang Seng lost -29.64% and -24.30%, while emerging market equities and foreign exchange fell -18.81% and -4.35%. So, broad-based capitulation. It was Treasuries that benefited, rallying just over 48 basis points. I wonder how the bond bears are feeling now.
More Trade Headlines – In Europe, the European Union Trade Commissioner Cecelia Malmstrom warned, “If the U.S. imposes these [20% higher] car tariffs, that would be very unfortunate, but we are preparing together with our member states a list of rebalancing measures as well.”
Back here in the U.S., Bloomberg noted there was limited support from auto groups and industry workers for higher tariffs on imported cars. The Senior Vice President of Government Affairs of the Motor & Equipment Manufacturers Association Ann Wilson noted, “The imposition of tariffs is a risk to our economic security that jeopardizes supplier jobs and investments in the U.S.”
In other headlines, President Trump discussed the Fed raising rates and the stronger dollar. The White House was quick to issue a statement saying that the President “respects the independence of the Fed” and that he “isn’t interfering with Fed decisions.”
Flashback – During his presidential campaign, Trump was highly critical of Fed Chair Janet Yellen. He accused her of keeping interest rates low to help Democrats. Ms. Yellen denied the accusation and said politics didn’t factor into the Fed’s decisions. In addition to not understanding trade, Trump just proved he does not appear to comprehend currencies either. Talk about selective memory.
Despite the discussion above, market moves have been well contained. In Asia, equity markets were decidedly mixed. U.S. equity futures have taken a leg lower following Donald Trump’s comment that he is “ready to go” with tariffs on more than $500 billion of Chinese imports. Even still, losses remain well contained, helped in part by strong guidance from tech heavyweight Microsoft after it announced earnings after the bell yesterday. In fixed income trade, Treasuries are mixed with some weakness on the long end of the yield curve. Currently, the key 10-year Treasury benchmark is yielding 2.86%. The long bond is priced at 2.99%. On the front end, the two-year Treasury is yielding 2.58%.
Finally, in terms of today’s calendar, there is nothing of note in the U.S. The St. Louis Fed’s James Bullard will speak on the U.S. economy and monetary policy at a Glasgow Chamber of Commerce breakfast in Glasgow, Kentucky this afternoon.
July 16 - 20, 2018: The Week Ahead
Future Fed Expectations
|Probability of Fed Funds rate increase on August 1, 2018||19%|
|Probability of Fed Funds rate increase on September 26, 2018||88%|
**All quoted rates are indications and are subject to change without notice.
* ISI is a member of the FINRA/SIPC.
The information contained herein is prepared by ISI Registered Representatives for general circulation and is distributed for general information only. This information does not consider the specific investment objectives, financial situations or particular needs of any specific individual or organization that may receive this report. Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities. All opinions, prices, and yields contained herein are subject to change without notice. Investors should understand that statements regarding future prospects might not be realized. Please contact Balance Sheet Solutions to discuss your specific situation and objectives.