No Sleepy August As Trade Tensions Ratchet Up

August is typically a sleepy month in the capital markets. Many participants are focused more on summer vacation and prepping for the final stretch of the year. However, this August was anything but sleepy. The fireworks kickstarted the first day of the month, sparked by a reliable and consistent source of market volatility in recent months/years a tweet from President Trump. Beginning September 1, according to the president’s announcement, the U.S. would impose a 10% tariff on the remaining $300 billion of goods imported from China. The move was totally unexpected by the markets and came less than 24 hours after the FOMC announced a mid-cycle adjustment to the fed funds rate of 25 basis points (bps). A significant risk-off trade ensued, with Treasury yields falling 10-15 bps across the curve and equity prices sharply lower.

August At-A-Glance

• August was atypically volatile for global financial markets in response to escalated U.S./China tensions.
• The Fed is expected to cut the fed funds rate again in September, Powell and his colleagues have been hesitant to suggest a new easing cycle has begun.
• Looking ahead, markets remain most sensitive to U.S./China headlines, but the looming Brexit deadline also has the attention of investors.

Not surprisingly, the timing of the tweet sparked speculation that Trump’s decision was the direct result of his disappointment in the Fed’s actions and forward guidance (i.e., not dovish enough). This is pure conjecture, of course, but there is very little certainty or confidence with regards to the trajectory of current U.S./China negotiations from a market perspective. There was short-lived relief for risk markets earlier in the month when President Trump announced that some of the $300 billion worth of goods would be temporarily exempted from tariffs during the holiday shopping season in order to provide relief for U.S. shoppers. The latter would seem inconsistent with the White House’s adamant stance that only China is impacted by tariffs, which has been strongly rebuked by many economists. Trade tensions were ratcheted up again on August 23 when China announced retaliatory measures to the new U.S. tariffs, including the resumption of a 25% duty on all U.S. cars sold in China beginning December 15.

The retaliation further reinforced market expectations that China was willing to dig in following media reports that the White House was concerned about the trajectory of the U.S. economy ahead of the 2020 election, something that Chinese leaders don’t have to worry about. President Trump was quick to respond, announcing later in the day that the U.S. would be increasing both current and upcoming tariffs, typifying the tit-for-tat escalation of trade tensions that has worried market participants for more than a year.

This market overview is provided by ALM First Financial Advisors, LLC, the investment advisor for Trust for Credit Unions. Read more from ALM First about the latest economic data releases and overall market trends at Trustcu.com.