Today’s Key Market Drivers: 6th August 2019
US Markets sink on US / China trade war tensions as US Treasury declares China a currency manipulator.
The US Treasury Department added fuel to the fire late on Monday Washington DC time releasing a statement saying China is a currency manipulator. CNBC reports that “Secretary Mnuchin, under the auspices of President Trump, has today determined that China is a Currency Manipulator,” the Treasury Department said in a release. “As a result of this determination, Secretary Mnuchin will engage with the International Monetary Fund to eliminate the unfair competitive advantage created by China’s latest actions.”
Financial markets have sold off heavily on Monday with the S&P 500 and Dow Jones closing down 3% and the tech-heavy Nasdaq down 3.5% their largest one day falls in 2019. Asian and European markets were no better off with the FTSE 100 in London down 2.5% and the Nikkei in Tokyo down 1.75%.
As I said last week financial markets needed a reason to sell off and they didn’t just get one reason, they got two or three. The Fed was not as dovish as markets expected them to be, Donald Trump went against the better judgment of his oval office team and decided on his own that the USA would impose more tariffs on China. China has now retaliated and financial markets are genuinely fearful that the latest trade war could get worse and spill over into a broader global economic slowdown.
China retaliates by devaluing its currency.
As expected, China has retaliated by devaluing its currency on Monday to offset the trade tariffs being imposed by the US. This is an attempt to give China a trade advantage however it is a double edge sword for China as any further currency manipulation is going to see Chinese citizens use any means they can to get their money out of China. The Government does not want a rush of money to leave China nor does it want civil unrest like we are seeing in Hong Kong. China has plenty of options and it is not afraid to fight a trade war with the US but it also knows the USA has an upper hand.
Monday saw the Chinese allow its currency to devalue below 7 Yuan to the US Dollar which it has been protecting for some time. The Aussie Dollar against the greenback fell below 0.6750 with the Kiwi Dollar falling back to its 2019 low of just under 0.65c.
Bonds were the big movers on Monday with traders selling down risk assets (stocks and currencies exposed to China) and buying up the safe havens.
Ray Dalio’s predictions may be right.
Last Xmas I released a podcast where I broke down the most successful and largest money manager in the world (Ray Dalio’s) take on financial markets and where they are heading in 2019 and beyond. If you have not watched this podcast and you are serious about making money as a private investor then it is a MUST watch! I explain in layman’s terms where asset values are likely headed in the coming years as we move towards the end of the short term and long-term debt cycles.
Ray Dalio also tells us what history shows has happened in the past when a superpower is threatened by a rising superpower. History is a great guide to what may happen in the future and Donald Trump is treading on very thin ice right now. Here is the link to the podcast and I strongly urge you to take some time to watch it and if you watched it back at Xmas take some time to watch it again.
RBA to remain downbeat and dovish today.
The RBA will release its August statement today and will remain downbeat and bearish about the global economic outlook and the local economy. If the trade war between the USA and China continues on its current path there is no question the global economy will be impacted and Australia will likely have the recession it has not had for decades.
It is my belief the RBA will drop rates in coming months another 0.25% bringing the cash rate towards 0.50% before Xmas. The AUD v USD being worth 0.50c is not that far down when you consider the AUD v USD was 0.81c in January 2018. The possibility is the local currency could be in the low 0.50c range by the end of 2020 if Trump continues on his current path.
There is nothing and I mean nothing in the short to medium term to give me any optimism that the global economy is going to turn around. This current economic contraction is here to stay for the balance of 2019 and 2020.
Don’t discount the US manipulating its own currency lower.
Don’t’ forget what is coming in 2020. A US Presidential election and Trump is going to want to protect the US economy and ensure he takes a hard-line stance on China, Russia, Iran and any country that threatens the USA. His supporters love it when he goes on the offensive and the next offensive move by the US Treasury may be to lower the value of the US Dollar by direct manipulation.
If major Central Banks around the world are dropping interest rates the value of the US Dollar will rise and this will make the USA less competitive. This is Trump frustration and it would not surprise me to see him get even more aggressive. It’s the way he rolls.
Trump really is a goose.
When you look at how well the US economy is doing compared to the rest of the world why would you screw with that and pull on a trade war with China that threatens to derail your own economy and send it back into a recession? It’s pure madness!
The USA’s current unemployment rate is 3.7%, the country is fully employed, company earnings are doing nicely and the stock market has been moving along to new highs and the country is in relatively good shape. If the US Fed believes the economy needs more rate cuts, they will act but they don’t need Trump’s advice on when and how much it should be cutting rates. The Fed successfully steered the US economy out of the global financial crisis and it is smart enough in the coming 12 months to deal with the global economy contracting and keeping the US economy the envy of the world.
Trump’s erratic behaviour is threatening the global economy. History shows these sorts of selfish, narcissistic egomaniacs eventually cause wars between countries that decimate economies and peoples lives. I do not say that lightly, I say it with a genuine concern because billions of people around the world will be impacted by a downturn in the global economy and most of them won’t see it coming.
Now is not the time to put your head in the sand.
Do not ignore what is going on! Central Banks are lowering interest rates back to levels seen during the GFC and we DO NOT currently have a GFC. We are yet to see a significant shift in global sentiment and a global recession. If we were to see one what are Central Banks going to do then? They will already have interest rates at zero and will already be artificially printing money. The ammunition Central Banks used to stimulate the global economy during the GFC isn’t available if we see another major economic downturn. Now is not the time to over-leverage yourself with debt and now is not the time stick your head in the sand and ass in the air.
Dreams do come true. If you are willing to fight for them.
About the Author: Andrew Barnett
Andrew is a professional trader and successful investor who has a strong focus on education. He is a regular Sky News Money Channel Guest and one of Australia’s most awarded and respected financial experts and is regularly contacted by the Australian Media for the latest on what is happening with the Australian Dollar. Director at LTG GoldRock, Andrew Barnett, guides thousands of traders around the world in the live market on a daily basis, advising them on buy and sell directions, as well as trading his own personal account. Andrew, a regular keynote speaker at trading and wealth-creation events throughout the Asia Pacific region, is an authorized representative registered with the Australian Securities and Investment Commission (ASIC).
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