Trump shook the stock market
The Chinese Ministry of Finance announced on Friday the imposition of retaliatory duties on U.S. goods worth USD 75 billion. Products are to be taxed at rate of 5 to 10 percent. Changes will be made in parts: the first part on September 1 and the second on December 15.
China's decision annoyed U.S. President Donald Trump, who immediately made some comments regarding the situation on Twitter. They were not just simple comments.
First of all, the U.S. president ordered American companies to withdraw their production from China, and ideally to return to the US. Trump even mentioned specific companies: Amazon, FedEx and UPS.
Secondly, Trump announced that Chinese USD 300 billion worth of goods, which were to be subject to 10% tariffs from 1 September, would be taxed at 15%. In turn, from October 1, goods from China worth USD 250 billion, currently taxed at 25%, will be taxed at 30%.
This first information is a real shock, because the possible production relocation from country to country is a huge cost for any enterprise. This, in turn, worsens the corporate outlook and automatically deters investors. It is thus no surprise that on Friday American stock indices lost roughly 3%.
In turn, the second tweet (the one about raising tariffs) appeared after the session close. During the weekend, indices significantly fell, and then they rebounded. On Sunday afternoon, the situation improved significantly after Chinese Deputy Prime Minister Liu He said that his country was able to deal with this situation. Shortly after his speech, yuan began to strengthen, stocks began to rise, and gold fell slightly. Somehow, it's hard for us to believe that the Chinese deputy Prime Minister has such influence on the markets.
Below you can see how quickly the situation on the Dow Jones index changed over the weekend.
On Monday morning, Donald Trump mentioned that China is ready to resume negotiations. This statement quickly translated into market situation. In effect stock markets went green. That means that markets recovered all losses, as if no increase in tariffs by the U.S. would take place at all!
Regarding the tensions, it is worth adding that on Sunday at the G7 meeting Donald Trump stated that he regrets not rising duties even more.
Also noteworthy is how the U.S. President described the actions of the Fed. In his opinion, the Federal Reserve is doing nothing to improve the situation and therefore Trump asked the question: "Who is our bigger enemy, Jerome Powell or Xi?"
At the moment, the key question is: will the events of recent days cause a sale similar to that of the end of 2018, or will politicians suddenly change their behavior and optimism will return to the market? Trader21 recently described this second scenario in the article "How does Trump manipulate the markets?"
Determining direction in which the stock market will go over the next days is extremely difficult, but we have no doubt that Trump will not give up further strikes on China. Reason? The latest data from the American economy shows that it is starting to follow the footsteps of other major countries, i.e. going straight towards recession. In just over a year, presidential elections will be held in the U.S.. If Trump does not want the weakening economy to rob him of his re-election, he must strike a sense of American pride. Hence, frequent words about China is stealing intellectual property and jobs from the U.S.. We are convinced that in the coming months Trump will not only change his rhetoric, but will even intensify his attacks on China.
Will Deutsche Bank follow Lehman Brothers?
A lot has changed since the time when almost all products and services from Germany were recognized as solid. Today, the largest German bank, Deutsche Bank, is associated more with dismissals of employees, participation in scams and mass withdrawal of funds by customers.
After an unsuccessful attempt to merge with Commerzbank, the management of Deutsche Bank decided to restructure as a result of which 18,000 employees will leave the company by the end of 2022.
Such decisions, however, are not rebuilding trust of customers and contractors. RenTec, the best hedge fund in the world, ended cooperation with Deutsche Bank a few weeks ago. Many other hedge funds are making similar moves, fearing that DB will become the next Lehman and freeze their funds, at least for a while. In July, an average of USD 1 billion has been withdrawn daily from Deutsche Bank.
Deutsche Bank wants to completely withdraw from investment banking. Managers are just thinking about how to transfer the USD 168 billion of balances related to Deutsche Bank's brokerage office to the French BNP Paribas. It is worth noting that some hedge funds, before the two banks agree, withdraw funds from DB and place them in BNP Paribas. If the process gains momentum, the largest German bank may soon face enormous problems.
In this case it is important to remember that Deutsche Bank is the so-called "systemically important" institution. This means that the German government and international financial institutions will most likely not allow it to go bankrupt. Repeat from the U.S. events in 2008 cannot be ruled out. In this case, the German government significantly recapitalizes the bank, at the expense of taxpayers. Just a few years ago we would write that such a decision will lead hundreds of thousands of Germans to the streets. At the present, however, native Germans are playing a smaller and smaller role in their country and it is really difficult to predict the reaction of the society.
One thing is without the doubt - Deutsche Bank's situation is dramatic, which is best reflected by the quotations.
DB shares have lost as much as 94% since the peak.
An inverted yield curve alerts about upcoming recession
The situation where 2-year U.S. bonds pay more than 10-year bonds is very rare (long-term securities usually pay higher interest) and effectively predicts the onset of recession.
We mention that because 2 weeks ago the yield on 2-year U.S. bonds was slightly higher than the yield on 10-year bonds.
As you can see, this situation previously occurred in 2000-2001 and 2006-2007. It was a time when the stock markets reached their highs. Later, recession appeared, and subsequently we had a bear market on the stock exchange.
Will it be similar this time? As for the economy - we have no doubt that so. As for the stock market - here central banks will certainly use tools that will be aimed at preventing panic. Maintaining bond prices will be particularly important for them. This is one of the reasons that suggests continuation of increases in the bond market (a small correction in the meantime may occur).
This year is a year of safe assets
Some people might say that the stock market is doing quite well, so worries about the economic outlook are exaggerated (stock market drops usually are ahead of a recession).
The truth is, however, that this year the so-called safe haven assets are on fire. Investors focus on them when seeking for safety, not for high returns. This group includes bonds, gold and Japanese yen. In the chart below, the navy blue line indicates high volatility on these usually calm assets.
If we consider the current year, U.S. stocks perform worse than both gold and long-term U.S. bonds. The difference, however, is small, because the shares had a great start to the year.
If we go back to the beginning of the previous year, it turns out that over the past 20 months, U.S. shares have earned 11%, while gold and long-term bonds - 16 and 22 percent, respectively!
At this point we want to emphasize that we do not try to scare you of investing in stocks but we only attempt to read market behavior. For us it is clear - investors are increasingly turning to safe assets. Taking into account what we have written about the inverted yield curve, it can be concluded that in the coming weeks precious metals and cash should have a significant share in the portfolio.
Jeffrey Epstein found dead in prison
On August 10, Jeffrey Epstein was found dead in his prison cell. The official version says that he committed suicide, but fewer people believe in such stories. It is hardly surprising - eventually the guards were supposed to look after Epstein every half hour, and he committed suicide just when they slept for a while. What an extraordinary accident.
Epstein was murdered because he knew a lot, too much. If we were to pick someone who had dirt on a long list of famous people, we would probably choose him.
Who was Jeffrey Epstein? Pedophile with a long list of sexual offenses, and at the same time close friend of, for example President Bill Clinton. Epstein's supposed "suicide" made him louder, but a few years ago you could find movies describing Epstein's activities on the web. He dealt with, among others organization of orgy for politicians (of course with the participation of minors) whom he transported with his plane called Lolita Express. The aforementioned Clinton was on board this aircraft at least 4 times. Among Epstein's other friends we will mention also Donald Trump, Mark Zuckerberg and Bill Gates.
Epstein was convicted of sexual offenses in 2008. It was actually a settlement between the court and Epstein. Despite the initial large number of charges, he was sentenced to only 18 months in prison, of which he served 13. How is this possible? Epstein hired a team of private detectives who searched for material against both his victims and the judges. Blackmail benefited the pedophile in the form of an exceptionally mild sentence.
Epstein's history confirms that people who commited serious crimes (e.g., pedophilia) are admitted to high political positions. It is much easier to control them.
Two days before his death, Epstein wrote his will. The value of his assets is 577 million dollars. His entire activity should be treated primarily as a major intelligence operation. Its purpose was to gather information on the most influential people in the world. In turn, Epstein was an agent, mentally unstable enough to skillfully accomplish his task.
Who did he work for? There is much speculation in this case, but the most indications are that he worked for Mossad.
Independent Trader Team