The Confounding Market?

Fred Imbert and Alexandra Gibbs of CNBC report, Dow drops 150 points after Trump says additional tariffs on China are ready to go:
Stocks fell on Friday after President Donald Trump said the U.S. is ready to slap tariffs on an additional $267 billion worth in Chinese goods.

The Dow Jones Industrial Average dropped 150 points while the S&P 500 fell 0.3 percent. The Nasdaq Composite also traded 0.1 percent lower.

Trump, speaking from Air Force One, said the tariffs on the additional goods are ready to go when he wants. His remarks come after a deadline for comments regarding tariffs on another $200 billion in Chinese goods had passed last night.

The iShares China Large-Cap ETF (FXI), which tracks certain Chinese stocks, fell to trade 1.5 percent lower. The iShares MSCI Emerging Markets ETF (EEM) also dropped 0.7 percent to re-enter bear-market territory.

They also come after the Wall Street Journal reported, citing U.S. officials, that the possibility of the U.S. and China reaching a trade deal are fading as the Trump administration tries to revamp the North America Free Trade Agreement (NAFTA). Meanwhile, Bloomberg News reports that the U.S. and Canada will likely end the week with no trade deal in place.

"There are lots of uncertainties in the market right now," said Komal Sri-Kumar, president of Sri-Kumar Global Strategies. The U.S. has been largely resilient, but "there are significant storm clouds that are gathering."

Trump also said the U.S. would be starting trade negotiations with Japan, noting: "If we don't make a deal with Japan, Japan knows it's a big deal."

The Japanese yen clawed back to recover some losses against the dollar; it was last down 0.1 percent at 110.85 per dollar.

Wall Street was also under pressure after strong wage data stoked fears of tighter monetary policy in the U.S. Average hourly earnings rose 2.9 percent for the month on an annualized basis, marking the largest jump since 2009. The U.S. economy added 201,000 jobs in August, more than the expected increase of 191,000.

Treasury yields jumped to their highs of the session following the jobs report release, while the dollar also rose. The Fed has already raised rates twice this year and is largely expected to hike two more times before year-end.

"This does give more support to the folks looking for December rate hike," said JJ Kinahan, chief market strategist at TD Ameritrade. But "we continue to see strength where we need to see it," and that's good for the market.

Boston Fed President Eric Rosengren told CNBC earlier on Friday that gradual rate hikes are appropriate should the economy continue to do well. "If things work out well for the economy, and that's what I expect and hope, then we'll be in a situation where we need to have somewhat restrictive policy over time," he said.

"The data is becoming even more important than ever now as the market tries to decide whether the Fed will raise a fourth time this year in December or take a pause," said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance. "I would continue to be cautious as we head into the fall and be wary of trade concerns and increased equity volatility."

Trade tensions, coupled with a meltdown in emerging markets, have pressured equities this week, knocking the S&P 500 and Nasdaq from record highs. In fact, the Nasdaq was on track for its worst four-day start to September since 2008.

Tesla shares fell as much as 9 percent after Dave Morton, the company's chief accounting officer, resigned from his post. Morton said in a statement he left because of "the level of public attention placed on the company."
It's Friday, President Trump went bezerk on trade again (his timing is impeccable) and Elon Musk was kicking back last night, smoking marijuana on a live web show with US comedian Joe Rogan:
Musk, 47, spent two-and-half hours on the streamed podcast late on Thursday discussing everything from artificial intelligence and its impact on humankind to flame throwers and social media.

Taking a puff from a joint – which Rogan said was a blend of tobacco and marijuana and is legal in California – Musk said he “almost never” smoked. “I’m not a regular smoker of weed,” Musk said. “I don’t actually notice any effect … I don’t find that it is very good for productivity.”
Smoking pot isn't very good for productivity? You don't say?

The market had plenty to say on Musk's latest escapade as Tesla shares (TSLA) got slammed on Friday, down 6% on twice the daily average volume. Tesla's shares are weak and might retest their 52-week low of $244 a share hit back in April (click on image):

Short sellers are loving it but if you look at the 5-year weekly chart, Tesla's shares are right at their 200-week moving average where they bounced in the past (click on chart):

If shares continue to slide from here, it's bad news for investors as the stock will be in big trouble.

That's my two cents on Tesla shares, don't want to spend too much time analyzing this company and its CEO who is eccentric and strange, to say the least.

More importantly, if you look at the overall US market, the S&P 500 (SPY), it's gotten hit recently but it's still a very bullish chart (click on image):

So what's the big deal? The big deal is what's going on with emerging market shares (EEM) led by Chinese shares (FXI) which are down roughy 15% from their high reached in late January and are at risk of declining below their 200-week moving average (click on image):

The last time that happened was in early 2016 when we had a really bad growth scare.

As I explained yesterday in my comment on why pensions are rushing to buy Treasury strips, it's what happens outside the United States which matters more in terms of inflation expectations and the demand for Treasuries. At the margin, corporations rushing to buy "strips" ahead of the tax deadline helps but that's not the primary driver of US long bond yields.

If a full-blown emerging markets crisis materializes this fall, you will see inflation expectations sink, the US dollar will soar higher and Treasury yields will plummet to new lows.

This is why I cannot understand strategists who are confounded by the outperformance of US stocks relative to the rest of the world this year.

As Francois Trahan of Cornerstone Macro pointed out recently, this is a textbook late-stage rally, breadth deteriorates, growth stocks outperform value and if it gets worse, investors will return to stability.

But today we saw bond yields rise after the strong US jobs report as some are openly worried the Fed is behind the curve when it comes to wage inflation:

I'm not worried about US wage inflation running amok, I'm far more worried about the Fed continuing to hike rates based on (lagging) employment data while weakness in emerging markets persists.

The risks of policy error are huge, if the Fed overdoes it with rate hikes, it might exacerbate any deflationary crisis brewing in emerging markets

Keep this in mind as people tell you the US economy is doing great and the Fed should continue raising rates, ignoring what's going on in emerging markets.

Below, semi stocks (SMH) are getting knocked off their perch and some market watchers think it's the canary in the coal mine.

Looking at the 5-year chart, I'm not worried yet, but definitely keeping a close eye on semis as I do believe they can get hit more if global growth continues to deteriorate.

Lastly, Elon Musk made an appearance on the Joe Rogan Experience, a podcast hosted by the eponymous comedian, where the pair smoked a blunt and pondered the flat-Earth movement, the future of AI, “inventing shit” and several other of the eccentric billionaire’s favorite topics.

On that high note, have a great weekend and please remember to kindly donate or subscribe to this blog at the right-hand side under my picture. I thank those of you who take the time to contribute.