September 21, 2018

Stocks opened higher again this morning (Dow +70 pts; SPX +.12%). These averages are having their best week in two months despite escalation in the trade war. Telecoms are surging 1.5% after a research shop upgraded AT&T (T). Industrials and energy sectors are up about .5%. After a 2.8% gain this week, financials are trading flat. European stock markets are up .8% today and Asia was broadly higher overnight. Bonds, on the other hand, are trading lower as interest rates head higher. The 5-year Treasury yield is up around 2.96%, a 10-year high. The 10-year Treasury yield ticked up to 3.07%.

The dollar looks to have topped out a couple of weeks ago and has begun to fall a bit vs. other major currencies. This is giving emerging markets equities some breathing room. After diving 21% from late January through early September, the iShares Emerging Markets ETF (EEM) has bounced back 5%. Even China is clawing back some of its lost ground. The Shanghai Composite Index fell 25% before turning around last Monday. Part of the reason for the dollar’s sag this week is a pledge by China that it will not devalue its currency in order to punish the US for trade tariffs. Also, we’ve heard some more positive economic news from Europe. And maybe traders feel like the coming trade war will convince the Federal Reserve to be more gradual with interest rate hikes.

Mohamed El-Erian, a well-respected money manager and economist, says we shouldn’t be worried about losing the trade war. “All this rhetoric you hear from both sides…it’s about the journey, not destination. The destination, in my opinion, will not be global trade war.” But that doesn’t mean our economy and market won’t suffer some negative impacts in the near-term. “As long as the US is willing to incur damage” for a while, it will certainly win the dispute. The bigger problem, he says, is a stronger dollar and interest rates as a result of the US weathering the storm better than foreign economies.


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