Financial markets

21-09: Rate cut

Markets are calm and waiting for a direction

Without the US-China trade war and the Brexit soap, the markets would be in very calm weather. Central banks are keeping the bull market alive and do take the measures that are expected from them. These days, central banks prepare the markets quite well. Not many surprises have been happening in the last couple of years. This week the main event was the rate decision by the Fed, the central bank of the US. As expected, Fed chairman Powell announced to cut the interest rates by a quarter percentage point for the second time this year. It was the second rate cut in a decade.

Why a rate cut?

The Fed wants to keep the economy going. The labor market is still strong, the unemployment low and economic activity has been rising at a moderate rate. Though, business investments and exports have weakened. Moreover, the core inflation is running below 2% on a 12-month basis. That is on the low side. The economic outlook has worsened this year. The trade war and the Brexit soap have brought quite some uncertainty in the economy and businesses are less eager to invest and grow in the current environment. Based on this and the low inflation, the Fed decided to lower the interest rate to the target range of 1.75-2.00% (from earlier 2.00-2.25%). It gets cheaper for businesses to borrow money and the lower rate should help fight the uncertainty of the geopolitical challenges and uncertainties. In order to keep the economy going.

More rate cuts to come?

The members of the committee that decides, the FOMC, are quite split on what will (have to) happen next. For the meeting of this week, 7 out of 10 officials voted in favor of the cut, two opposed it and one wanted a half percentage point cut. Powell signaled that the rate cut was not the start of a downward cycle and said that the Fed keeps on monitoring incoming information and will act as appropriate to sustain the expansion. The members of the FOMC are having different opinions on what might happen next.

What factors will influence the future Fed decisions?

  • US-China trade war
  • Inflation figures
  • GDP growth
  • Job market numbers (Non Farm Payrolls)
  • Brexit developments

What does Trump want?

Trump can shout and be angry. But the Fed will decide what to independently of what Mr Trump wants. Trump wants lower and lower rates which will weaken the Dollar and will give a boost to the economy for his Nov 2020 election. Theoretically there is some dependence between Trump and the Fed. Trump can theoretically fire Mr Powell. He most likely would not do that as it would undermine the confidence in one of the most important organs, the central bank of the biggest economy.

Lower rates can boost the stock markets as the economy might get a boost from it and bond holders might shift their money towards stocks as well.

One last time Draghi

The main event of this week was the ECB meeting in Frankfurt. As we know the economy of the Eurozone is showing signs of weakness with Germany most likely soon entering an official recession: two consecutive quarters of negative GDP growth. The ECB mentioned earlier this year again that the risks in the eurozone are tilted to the downside. Overall markets seem to be in the late stage of a bull market with geopolitical trade risks. The ECB was expected to come with new stimulus to bring back inflation and to avoid further detoriation of the economy in the Eurozone.

What is the main goal of the ECB?

The main goal of the ECB is price stability. They aim to have the inflation in the Eurozone below, but close to 2%. The idea is that the benefits of price stability are substantial. According to the ECB, maintaining price stability on a sustained basis is a crucial pre-condition for increasing welfare and growth potential of an economy. All measures the ECB take are focused on this price stability and should be positive for the Eurozone economy.

Which important measures did the ECB take this week?

  • Lowering the deposit rate facility from -0.4 to -0.5%.
    The deposis rate is the rate at which banks can deposit reserves overnight at the ECB. It gets more expensive for banks to deposit money at the ECB overnight. The idea is that banks will be even more eager to lend money to their clients which will help investments and give a boost to inflation and the economy.
  • Quantitive Easing (QE) again by buying €20bln government bonds each month, as long as neccesary.
    The idea is that banks take the new money and buy assets to replace the ones they have sold to the central bank. That raises stock prices and lowers interest rates, which in turn will boosts investment.
  • Two tier system for banks that deposit reserves at the ECB.
    To make sure the banks do not get punished too much by the low interest rates, parts of their reserves are exempt of the negative desposit rate facility.

What does this mean for the stock market?

Most of the above measures were already expected by the financial markets, but markets were still happy that they were taken. Stocks markets went up around 0.5%. For the upcoming time, with the measures taken, one can expect that the interest rates stay very low. In Germany the 10-year yield will probably stay below 0% for a while. Even yields in more risky countries like Italy are very low. The Italian 10-year yield is below 1%.
Stocks will probably stay populair for the upcoming time, possibly at least 1 or 2 years. The investor that looks for yield finds it difficult to avoid stocks. Interest rates are low, bond yields are low, the bank account is useless. Companies still make good profits and quite some pay good dividends as well. And maybe interest rates will stay low for a long time to come. There is not a great alternative for stocks.
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06-09: B(O)REXIT?

The stock market has been moving up in the last trading days. Markets have been calmed by two situations:
– No-Deal Brexit less likely
– Trump and China back at the negotiation table

No-Deal Brexit less likely
Boris Johnson has experienced a very difficult week. Before this week the odds for a No-Deal Brexit were going up quite a bit and reached somewhere around 40%. This week Johnson lost a couple of very important votes in the British Parliament and he lost his parliamentary majority.
On Wednesday Johnson lost a vote. Parliament (including some own party rebels) voted that the UK cannot leave the EU without a deal. Johnson panicked and rebels were eliminated from his party and he lost the majority in the Parliament.

To save himself, Johnson saw one possibility and that was to call new elections which would be held October 15th. Also here he got defeated by the parliament. Johnson aims to try it again but the opposition already told him they would block it.
Moreover, today also the House of Lords has voted for a law against a No-Deal Brexit possibility.
Boris Johnson finds himself in a difficult position now. He has been saying that the UK will leave on the 31st of October, with or without a deal. Parliament blocked a No-Deal Brexit, so Johnson needs to make a deal with the EU and get it through parliament before the end of October. That will not be easy, thinking back of Therese May’s adventure. Johnson will probably be forced to ask for an extension from the EU. This would probably mean a Borexit, as Boris Johnson promised not to extend the Brexit soap.

Trump and China back to the negotiation table
For what it is worth: Trump and China are back on speaking terms and decided to meet in early October to negotiate again about the trade war. The markets have been reacting positive to this news. But remember, one negative tweet from the Donald and it is all different. To be continued.

What now?
The Brexit story could continue and might give a bit of more relief to the market. The worst case scenario of a No-Deal seems to become less and less likely. For the trade war we might have to wait till October before big news comes out. On the other hand, with the stock markets going higher in the last days, Trump has some ‘room’ for angry China tweets again.
Some very interesting dividend opportunities came to the surface this week. Check them out.

01-09: Rebound & Brexit

The stock market had quite a strong week. Friday before last week was shaky with Trump adding tariffs of 5% on all Chinese goods. Followed by a lot of dramatic and very bearish news articles about what would happen on Monday. When everyone is so negative, very bad news is quite often priced into the markets.
And yes, we ended Monday with a plus. During the week we had more upticks. The trade war tensions between the US and China calmed down a little bit. China had indicated that they want to go on with the negotation talks and that these talks should aim at removing the tariffs. China also said not to retaliate on US latest tariffs. It is nice that they say that. Markets like it. But things can turn very quickly here as we have seen before. The last time China retaliated came a couple of weeks after new US tariffs. By then China also said that they have many more options to fight the US if needed.
So the conclusion of this week is that the markets do follow quite literally what the US and China say every day and do not take into account that much of these words might not mean a lot anyway. So I do not think that much changed over the week. Thoough the markets were quite bullish and making back the losses of the week before.
Value stocks seem to be turning around slowly. Want to read more about it? Check the stock opportunities.

Brexit developments

Boris Johnson said that the UK is definitely going to leave the EU on the 31st of October 2019. Ofcourse he needs to be clear on this and cannot go into negotiations with his parliament and the EU with showing any doubts. According to Betfair and what I have been reading the chances of not leaving the EU on that date might be somewhere around 50%.
As always in Politics, negotiations always take very long and are not easily done.
Moreover, the chances of a No-Deal Brexit have gone up recently and according to the betfair markets are now somewhere around 40%. JPMorgan came yesterday with the expectation of 35%. So a very reasonable scenario.

Important issues for the UK (in case of No-Deal)

When going to the supermarket you will see quite some products to be more expensive or not available. Nearly 30% of all food comes from the EU.
Travelling to Europe becomes a pain, some medication might me not available, UK people living abroad need to take extra measures, house prices might be affected, etc.
On the short and medium term it is a massive pain. On the longer term there might be benefits as the UK can make their own trade deals with countries like the US. They probably get a ‘GREAT’ deal if we may believe Mr Trump. Good to know is that any deals made can not be implemented in the first 21 months after leaving the EU. So the economy might really get a short/medium term shock. So can the Pound and the big financial industry in London.

Important issues for the EU (in case of No-Deal)

Countries in the EU trade a lot with the UK. The problem with a No-Deal Brexit is that costs will rise due to more custom controls, extra tariffs and increased costs in the supply chain. Costs will be higher and things will cost more time. For countries with quite some import and/or export to the UK, this will have a significant effect on their GDP.

Not everything is Trumps fault, its Brexit!

This already appeared by looking at the German GDP in the second quarter which was -0.1%.
When the number came out analysts were initially thinking it was due to the trade uncertainty regarding the US and China and also (potential) US tariffs against Europe.
German exports to the US actually jumped compared to last year. German exports to the UK fell with 15% year-on-year and has been causing the GDP to go negative. The Brexit uncertainty is most likely bringing Germany into a recession.

24-08: Ping-Pong against China

Before the US markets opened yesterday, China announced to put new tariffs of $75bln on US goods and resumed tariffs on US cars. Not a bad move from China after Trump showed some ‘weakness’ and tried to deescalate the trade war a couple of weeks back by delaying tariffs on some Chinese goods to the end of the year. China has the initiative now. Trump was very angry about these new tariffs. Probably while he woke up and was brushing his teeth he asked himself the question who is the bigger enemy: Powell or China? But more importantly, about who am I going to tweet first? His impulsiveness especially on China is not helping him.

With this tweet, he had to come back in the afternoon with a retaliation that would not be weak. He also immediately tweeted that US companies should rapidly start with finding alternatives for China. But what he came back with in the afternoon was not very creative. He came back with raising all tariffs on Chinese goods with an extra 5%. Little bit of a small hike and not showing strength. But he had to do something after his ‘just out of bed’ tweets.
End result was that the S&P fell nearly 2.5%!

Started the marathon with aggression

Trump started this trade war very aggressively and as with every war or match, getting to 1-0 is always what you want.

But he has been too aggresive, too coercive and limiting the options the US has. He started the marathon with a sprint, now to find out that he is not able to finish in time while the Democrats are lining up for beers at the finish to have a nice dinner with the Chinese.
With the back and forth sanctions between the US and China, the trade war ping-pong has started. Very bad strategy to play ping-pong against China.

Why is that?

Trump wants to get reelected in November 2020. And he also wants to make sure the US stays the prominent economy in the world. The US has a massive trade deficit with China which Trump sees as a threat for US jobs and national security. Moreover, China has deserved the reputation as an intellectual property thief. With the trade war Trump wants to slow China’s economic growth further to make sure they will negotiate about the topics that Trump finds important. Trump thinks the Chinese have no other way than to do concessions. Wrong!
The problem is that Trump’s time is running out. If he goes to far with the trade war, the US economy will be hurt badly as US consumers have to pay the bills for the trade war. He will have small chances to get reelected in a full escalation.
China is playing it hard. They are happy taking an economic hit now and make an ‘easy’ deal when a Democrat gets elected as president. Trump is getting out of options. He was hoping for the Chinese to give in and make a nice deal with him. He has been pushing the Chinese so much and not doing any concessions himself. The Chinese have taken over the initative, are ready for some smashes and the only thing Trump can do is defend to stay in the match, hope for the best and probably give up a little bit in the end.

Jackson Hole

Main expected event this week was the yearly conference at Jackson Hole. A valley somewhere in the middle of nowhere in Wyoming in the United States. The FED holds its annual economic symposium in Jackson Hole. But there is no need to talk much about it. The FED will take appropiate actions when needed according to Powell and currently he did not seem that concerned about the economy (yet?). Non event. When would the FED not take appropriate actions then? Words, but empty sentences.
For Trump, every outcome except ECB-like rates are not enough and he blames Powell for not doing anything.

And now?

It is getting clear that Trump is slowly losing this trade war and the Chinese have made up their minds. They are not going to be nice and happy. They are going to fight hard and go for a deal with a democratic president. My opinion is that the Chinese are not going to give in and that Trump is going to get a lot of pressure from the big US companies. He has to give in here and there, though this might take months to happen. Till then the markets will be volatile. Trump is pressuring the FED to lower rates more in September and be dovish. And after that make a ‘GREAT’ deal with China?
Last weeks and also in the upcoming weeks very interesting stock and option trades are appearing. Check below for these opportunities.

16-08: Market Doubts

The financial markets experienced a volatile week. The market is doubting which direction to go. Below a short overview of what has been moving the markets and what can be expected in the upcoming week(s).
To find out which individual opportunities are arising:

What is moving the markets?

  • Recession fears
    Germany quarterly GDP was below 0. If we get another quarter in Germany below 0 we officially enter a recession. Fears of a recession and recent profit warnings of companies are fearing investors.
  • Bond yields
    Bond yields ave come down massively. German 10-year yield is around -0.80%.
    The US yield curve is inverting more and more! Investors are struggling to see long-term high economic growth and inflation. And see below a picture of the US 30 year yield that has been coming down and down.
  • ECBs next bazooka
    ECBs officials are pointing towards another massive stimulus package. In another so called last attempt to bring back inflation. Whatever it takes is still live.
  • Hong Kong chaos
  • US-China trade war
    Trrump is unpredictable and China does not like to get bullied. Trump needs to ease the trade war to get reelected, but when will he do so?
  • Company earnings
    Are getting impacted by the tariffs.. For example Macy’s reported disappointing earnings and lowered the guidance.

And now?

The main problem is that there are too many uncertain variables for investors to enter the stock market and to choose a direction. As you can see above there are so many factors playing the markets. In the end, most will come down to a solution in the trade war between the US and China. As long as there is not a strong belief that a deal will be made this year, the markets will experience high volatility and you will experience high swings in your portfolio.
Market shocks will be bringing opportunities. Some stocks will get punished too much by irrational behavior or illiquidity. To find out which opportunities arise, check the stock reports, 
Short term trading is very difficult at the moment as you are depending very much on headlines regarding the US China trade war. For long-term trading, keep averaging down and do not read too much into every headline. Everyday there is a new surprise (or not).
Regarding a recession, yes it might happen. How long does it take? There is not much wisdom to communicate on this matter. Keep reinvesting the dividends seems a sensible thing to do. Do not let market fears affect your rational decision making.