The major US stock market averages dived in early trading on continued social unrest in Hong Kong. The Dow is currently down 239 pts and the SPX is down .7%. Ten of eleven market sectors are in the red; financials & energy are the worst performing. As is typical in August, exchange trade volume is pretty low. European markets are poised to close slightly lower today. Strangely enough, most of Asia closed higher last night. Despite intensified pro-democracy protests, Hong Kong’s Hang Seng stock index fell only .4% during the session. The US dollar continued to strengthen vs. China’s yuan and that’s putting some pressure on commodities (i.e. iron ore, copper, agricultural goods). WTI crude oil is unchanged around $54.50/barrel. Bonds are once again powering ahead as yields edge lower. The iShares 20+ Year Treasury Bond ETF (TLT) is up 1.5% today (and 17% on the year). High-grade corporates are up about .4%. On the other hand, Junk bonds are down .3%.

Pro-democracy protests in Hong Kong have grown increasingly violent. Authorities shut down all flights after protesters swarmed the airport. China’s government, which quietly controls Hong Kong behind the scenes, is now characterizing the mass demonstrations as “terrorism” and says the issue is at a “critical juncture.” China’s Global Times is reporting that China is preparing some sort of para-military policy force to possibly invade the island and restore order.

Investor sentiment has soured with intensifying trade tensions. According to a survey of retail investors by the American Assn. of Individual Investors (AAII), only 21% are bullish on the stock market over the next six months. That’s the lowest percentage of respondents since late December 2018 when the market was near the bottom of a 20% correction. On the other hand, about 48% describe themselves as bearish. Institutional investors usually view this survey as a contrarian indicator. That is, troughs in bullish sentiment usually coincide with stock market bottoms. So rather than giving up on the market, most professional investors are looking for buying opportunities as the market moves lower.

Four major Wall Street firms published their market outlook views today. Bank of America believes there is a 1-in-3 chance that the US economy falls into recession in the next year due to uncertainty around the trade war and global economic slowdown. A number of signs are “flashing yellow,” including industrial production, and bond market indicators like the yield curve. Still, the firm admits, there are some bright spots such as very low unemployment. Goldman Sachs says expansion of the trade war will affect the economy more than previously thought. The firm no longer expects a trade deal before the 2020 presidential election. The firm doesn’t expect a recession, but admits that fears of recession are growing. Morgan Stanley believes that if the Trump Administration raises tariffs on the remaining $300bil of imported Chinese goods to a level of 25%, a global economic recession is possible within nine months.

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