Currency war and trade war combining into a cauldron of risk : Corporate Buyback keeps stock high

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The trade war between China and US may resolve but not before it has escalate into currency war of mammoth proportion. The dollar index will rise if China actively engages in a currency war. It will affect US exports making it expensive compared to other countries.

The U.S.’s labeling of China as a currency manipulator “signifies the trade war is evolving into a financial war and a currency war,” and policy makers must prepare for long-term conflicts, Chen Yuan, former deputy governor of the People’s Bank of China, said at a China Finance 40 meeting in Yichun, Heilongjiang.

In Europe, Germany gets a health check this week with data due to reveal whether it managed to avoid shrinking in the second quarter.

german gdp
Germany could be headed for a recession when data is released this week. Big-name companies including Continental, Daimler, BASF and Lufthansa have all slashed their outlooks. Industrial production has already dipped into negative territory.

eurozone banks
As can be seen the banking system shows a falling profitability which is in live with the deflationary risks that are building economy wide in the euro zone. Deflation hits the banking system before any other sector. We need to watch if there is a change in the trend and if a weak euro will support future inflation risks.

A very important factor in world trade is credit conditions prevalent in China. The conditions tightened in 2016 and about a few months later, then, world trade start to dip sharply. However there has been some loosening of credit lately but the damage on the world trade has been much sharper than before.

Income inequality has been rising world over. In the US, the top 1% own over $100 trillion in wealth up from $60 trillion in 2010. The bottom 50% only hold 1.4% of share in 2019 as opposed to 3.6% in 1990.

mortgage

jolts
The data released last week was a stark reminder that the US labor market has peaked. The JOLTS data is a front runner to the health of hiring. Before firing begins, hiring stops. The JOLTs data shows exactly that as there was a near 3% fall in new jobs available. We need to see if this will fall further in July data. But the upside is almost completely exhausted.

US Manufacturing ISM

ism

ISM data has fallen to 53 but still above 50. The trend is down and hence we negative of US Manufacturing.

Corporate Buyback

corporate buyback

One has to question on what is keeping this market. The answer lies in the above chart. The corporate buyback has reached an all time high of over 220 bn $ even as the economy wide profit margin dips below the S&P 500 profit margins. This is a telling chart of what is coming....

Dollar Bull run set to continue

Dollar 32% bull run since 2011 is pushing US into recession. One long-term gauge of the greenback’s performance that stretches back to the late 1960s is having its best decade on record, emerging from the wreckage of the financial crisis with a 25% surge since the end of 2009. Another index from Bloomberg bottomed out a few weeks before the U.S. lost its AAA rating from S&P in 2011, only to jump 32% since then as the dollar trounced every other Group-of-10 currency along the way. The U.S. president often complains about the rally, including last week when he said it undermines American manufacturers like Caterpillar Inc. and Boeing Co. McIntyre, whose firm manages $75 billion, says significant dollar appreciation worsens financial results for S&P 500 companies, ultimately leading to fewer jobs and more unemployment. That will trigger a U.S. recession that drags down global growth, too, the Philadelphia-based portfolio manager said. The dollar’s multiyear run is likely approaching an end, based on the length of the three most recent bullish cycles, he says. McIntyre sees a bearish cycle about to start that lasts five to seven years, while currencies just about everywhere else outperform. “Currencies are unique in that they are not always driven by interest-rate differentials; growth differentials are more important,” McIntyre said in an interview. “As other central banks move into a position to cut rates, that’s going to be pro-growth for those countries, and we don’t see any scenario in which the dollar continues to keep powering ahead for the next several years.”

Oil

Oil prices rose in Friday to hit resistance at 54.3. It can make one last dash at 58 upper overbought area or it fall to 46.

 

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