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Sino-U.S. Trade Truce Fuels Stock Rally

By John Persinos on May 21, 2018

As a Baby Boomer born during the Eisenhower era, I often perceive the world through the prism of the turbulent 1960s. Stock market news today gave me a flashback to a slogan that was popular in the Sixties with anti-war protestors: Suppose they declared a war and nobody came?

This year, President Trump declared a war on China. A trade war, to be precise. Nobody came.

U.S. Treasury Secretary Steven Mnuchin announced Sunday that the U.S. trade war with China is “on hold” and the countries had agreed to put aside their tariff threats. Mnuchin said Chinese and American negotiators are creating a framework to address sticking points.

The trade war truce between the world’s two largest economies comes as a huge relief to Wall Street. Stocks soared higher today across the board.

Allow me to rain on this peacenik parade.

The major issues dividing China and the U.S. won’t suddenly disappear because of a few soothing words. Don’t get me wrong; trade wars are never a good idea. But it dismays me how often investors overreact to official talking points that are spouted on political chat shows. The Sunday gabfests are hosted by hacks who toss softball questions. It’s like watching state-run TV.

When Mnuchin was asked today by a CNBC interviewer whether investors should view his Sunday comments on trade as a glass half-full or half-empty situation, Mnuchin said with a straight face: “It’s completely half-full.” Um, okay.

When gibberish like this moves markets, you should get worried. An indelicately worded presidential tweet could easily reignite trade hostilities and send stocks skidding. To quote Alice, from Alice in Wonderland: “The question is, whether you can make words mean so many different things.”

Investors face many “known unknowns.” Let’s dive down the rabbit hole and examine a few.

The global growth engine sputters…

Global economic growth is slowing, an unexpected development. In 2017, the global economy enjoyed robust, “synchronized” growth. World gross domestic product (GDP) last year grew by 3.8% year-over-year, its fastest pace since 2011. Tax cuts in the U.S. and a pro-business administration in the White House seemed to auger well for 2018. But the prognosis has turned gloomier.

Economic surveys in Europe presage a cooling off in the euro zone, predicting a paltry 1.6% annualized growth in the region. Monetary tightening, onerous public and private debt, and renewed political instability are taking their toll on the Continent. Growth in the euro zone in the first quarter hit its slowest quarterly pace since mid-2016, growing by only 0.4%.

The chart below depicts GDP percentage growth in five major economies, from full-year 2016 through the first quarter of 2018, annualized (compiled with data from Haver Analytics).

U.S. GDP growth in the first quarter slowed to 2.3% annualized, following nearly 3% in the preceding six months.

Japan, the world’s third-largest economy, seemed to be coming off the ropes, thanks to “Abe-nomics,” the stimulus measures implemented by Prime Minister Shinzō Abe. But now the Rising Sun is sinking beneath the horizon. Japan’s economy in the first quarter shrank by 0.6%, causing investors to worry about the entire region of Asia.

China recently stoked those fears about Asia with looser monetary policy, going against the general global trend of tightening. The country’s policy-makers appear concerned about growth.

The world economy is beset by other woes.

Major oil producer Venezuela is collapsing from comically inept mismanagement by its socialist government. On Sunday, President Nicolas Maduro coasted to re-election in a contest widely derided as a sham. He now must quell an economic catastrophe that he helped create. Huge subsidies to state industries have been squandered; police brutality has spawned deadly street violence. The leftist Maduro seems to be taking his cue from Groucho (not Karl) Marx. Expect severe oil supply disruptions from this beleaguered banana republic.

In Argentina, a plummeting peso recently compelled the country to seek a bailout from the International Monetary Fund and hike interest rates to a whopping 40%. Brazil is mired in corruption scandals that boggle the mind with their brazenness. Italy last week indicated that it might renege on its massive debt. German exports are shrinking, signaling a flagging manufacturing sector.

To be sure, there are positives. The U.S. enjoys a housing and construction rebound, declining unemployment, strong retail sales, and a confident consumer.  Shareholders stand to reap a huge windfall from the tax overhaul bill President Trump signed in December.

But dangers lurk. Higher oil prices are great for producers and investors in the energy patch, but pricier crude also fuels inflation, which could prompt the Federal Reserve to more aggressively hike rates. Rising rates tend to kill stocks.

Today, it seemed that the U.S. and China had cobbled together a trade truce. Wall Street was ebullient. But as history teaches us, truces are made to be broken.

Monday Market Wrap

  • DJIA: +1.21% or +298.27 points to close at 25,013.36
  • S&P 500: +0.74% or +20.04 points to close at 2,733.01
  • Nasdaq: +0.54% or +39.70 points to close at 7,394.04

Monday’s Big Gainers

Analysts bullish on oil and gas producer.

Bank targeted for $4.7 billion buyout by FITB.

Staffing services agency gets new CEO.

Monday’s Big Decliners

Analysts pessimistic over biotech’s new drug trial.

Analysts worried about FDA’s stance toward biotech’s new drug.

Wall Street skittish about FITB’s expense in MBFI merger.

Letters to the Editor

“Will Brexit hurt the British economy?” — David H.

Britain’s inevitable departure from the European Union — so-called Brexit — poses grave dangers to the United Kingdom’s economy, especially its financial services sector.

London can wave goodbye to its status as Europe’s banking hub. Frankfurt, Germany already is picking up new banking business at London’s expense.

The 2016 referendum vote for Britain to leave the EU, combined with Downing Street’s fumbling response, represents a stunning example of self-inflicted national harm. Winston Churchill must be spinning in his grave.

Questions about global trade tensions? Drop me a line:

John Persinos is managing editor of Personal Finance and Radical Wealth Alliance, as well as chief investment strategist of Breakthrough Tech Profits.



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