October 1, 2018

Stocks surged at the open this morning (Dow +250 pts; SPX +.65%). Materials, industrial and energy sectors are all up over 1% in early trading. Only the most interest rate sensitive sectors—utilities and real estate—are in the red. The VIX Index fell below 12 and most global equities rallied. Even Chinese markets participated last night (Shanghai Composite +1%). The dollar is a little stronger today and commodities are mixed. Gold, copper and iron ore are falling in price, whereas WTI crude oil is up around $73.90/barrel. Despite trade war fears, global oil demand is healthy and the perceived constraint—what with trade sanctions in Iran & assorted problems in Venezuela—is supply. Bonds are mixed in early trading. Longer-term Treasuries are selling off a bit. The 10-year Treasury yield backed up to 3.06%. On the other hand, junk bonds are surging after a new trade deal with Canada was announced (see below).

Last night, President Trump announced (via Tweet) a new trade deal with Canada, replacing the 24-year-old North American Free Trade Agreement (NAFTA). With Mexico having already signed on, the new trade pact will be called the United Stated-Mexico-Canada Agreement (USMCA). Bloomberg characterizes this as a political victory for the Trump Administration, but says the actual economics of trade between the three countries may not change much. The new agreement provides for a cap on the number of automobiles manufactured in Mexico & Canada and imported into the US. And 40% of the content of autos must come from factories paying workers at least $16/hour. US farmers will be able to sell a bit more milk duty-free to Canada. Pharmaceuticals will enjoy long patent lives. But, unfortunately, the deal is complicated and no one is yet clear on how US businesses will have to alter their supply chains to comply. Perhaps the most important clause in USMCA is that member countries may not negotiate a separate trade deal with countries outside USMCA, such as China.

ISM’s Manufacturing Index edged lower to 59.8 in September from 61.3 in August. But don’t let that mislead you. All year the index, which measures business activity in US factories, has been at its highest levels in more than a decade. Remember, any ISM reading over 50.0 indicates expanding business activity, and readings in the high 50s are considered very strong. Despite the imposition of additional trade tariffs, the level of export orders remained over 60. In addition, the report didn’t suggest any negative impact from Hurricane Florence. According to Bloomberg, the “underlying components of the index continue to depict a sector in which supply is unable to meet robust demand.”

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