Iran, China trade and Fed watch: 'Will they or won't they' cut?
Hostage to a news cycle that never ends, investors are forced to digest an endless wave of geo-political events unfolding on nearly every corner of the planet. From an attack in the Gulf of Oman to the riots in Hong Kong, every story seems to add another brick to the wall of worry.
The United States has placed blame for two tanker attacks squarely on Iran. Even Rep. Adam Schiff, certainly no friend of the president and often a harsh critic agrees.
On the heels of massive demonstrations in the streets of Hong Kong, it looks like Beijing caved as Hong Kong's chief executive apologizes for her handling of a China extradition bill. Despite an apology, thousands turned out into the streets Sunday with many demanding Mrs. Lam's resignation. The size of the crowd is in dispute with organizers estimating 2 million and police pegging the number at just 338,000.
Whatever the number, the unrest seems unlikely to dissipate anytime soon.
Fed meets this week
Back here in the states, it's all about a “will they or won't they” Federal Reserve, as recent commentary from Fed chief Jerome Powell and company has implied rate cuts are coming. As far as the market is concerned it isn't a question of if, but when and how much. While the probability of a cut this week is low, markets have all but priced in July's FOMC meeting with odds of a 25-basis point cut coming in at 66 percent.
Markets have a history of making up their own mind as to whether a cut is on the horizon. With an inverted yield curve pressing out beyond 15 years and the Fed chair's commentary implying a third mandate... "to sustain the expansion," I think we could easily shave off 1000 DOW points if the release doesn't match investor expectations.
We're still a month away from the next round of earnings leaving investors to look elsewhere for clues on their favorite stocks. Consensus estimates for the S&P 500 continue to drip lower. With current 2019 estimates coming in just under $167, expected year on year growth has fallen from 10 percent to just under 4 percent.
U.S. yield curve
All the usual suspects are in play with tariffs and trade topping the list. The G-20 meeting is less than 2 weeks away and many are hoping for a Kumbaya moment between President Trump and President Xi. While it's possible the two will meet, I'd be surprised if we get anything other than an agreement to continue talks. I see little chance China will cut a deal that addresses key concerns like cyber security, IP theft and a state-run economy that defies international trade norms.
With our 2020 election just around the corner, Xi is making a political gamble. He's hoping to negotiate with someone from the other side of the aisle believing they will defend the status quo. Frankly, it's a strategy China has used effectively as the last several administrations did little to curb China's ambition and abuses. Currency manipulation, stimulus and debt could give them enough time to run out the clock.
600 companies urge the president to end trade dispute
President Xi got some support from 600 companies in a letter urging the White House to resolve the trade dispute. I don't think anyone would deny a resolution on trade would be good for both countries, but will the document look like a treaty or terms of surrender.
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Yes, 600 CEOs made a statement saying we should settle, and wishing we never took on the fight. With average salaries of $10 million to as high as $100 million along with compensation packages often 300x what their employees receive, it begs the question; who are they fighting for?
I'll let you be the judge.
David Nelson, CFA is the Chief Strategist of Belpointe Asset Management.