Who's to Blame For Bumpy Markets?

Leo Kolivakis  |


Jeff Cox of CNBC reports, Trump's contradictions are swinging the stock market this year:

Love him or hate him, President Trump has been very busy lately warming up to North Korea's leader as he rebuffs his G7 allies and he was back at it on Friday, slapping 25% tariffs on up to $50 billion of Chinese goods.

So what gives? I must admit, people don't understand Trump but as far as I'm concerned, he's as transparent as you can get.

First, he passed the largest tax cut in US history which mostly benefited large corporations. That's the number one reason why the stock market keeps rising and that's why even though corporate America hates any prospect of a trade war, CEOs are not publicly criticizing Trump's administration.

Second, his protectionist saber-rattling is just feeding his base, working-class Americans who lost or are scared of losing their well-paid manufacturing jobs. We can argue whether these policies are doing more harm than good, but for Trump, it's all about optics and garnering votes.

In early April, I wrote a comment on whether trade wars will crash the market and I said "no". I still think trade wars are being blown way out proportion and while it's possible they escalate and have a material impact on the global economy, I still believe cooler heads will prevail before we reach the point of no return.

However, that's where my good news ends.

The problem right now isn't Trump or trade wars, the problem is the Fed hiking rates and signaling it will continue hiking rates.

People get all emotional on Trump but they're missing the bigger picture, the global economy is slowing and there's not a damn thing Trump can do about it. He's running out of fiscal bullets.

Have a look at the chart below, courtesy of Denis Ouellet's Edge and Odds blog, a great blog to track even if I don't agree with all his contrarian calls (click on image):

Denis got this chart from Angel Talavera on Twitter and it basically shows you what I'm worried about, the global economy is slowing with Eurozone leading the way and emerging markets and the US not far behind.

No wonder ECB president Mario Draghi was dovish in his statement this week, walking a very fine line between the end of QE as he tries to manage market expectations:

The euro ( (FXE)) got crushed on Thursday and so did a lot of other currencies as the US dollar ( (UUP)) surged close to 52-week highs:

The greenback's strength was something I predicted last year when everyone was short US dollars but it's getting a bit overdone here and along with Draghi's dovish comments, it's been wreaking havoc on emerging market currencies, stocks ( (EEM)) and bonds ( (EMB)) (click on images):

Now, the carnage in emerging markets isn't pretty and definitely signals a Risk-Off market. And there could be more pain ahead for emerging market stocks ( (EEM)) and bonds ( (EMB)) especially if trade wars escalate (click on images):


Those 5-year weekly charts above make a lot of emerging market bulls very nervous as these charts are definitely not bullish.

But Mehran Nakhjavani, Partner, Emerging Markets at MRB Partnersthinks talk of an EM debt crisis is just plain silly:

If Mehran is right, the sell-off in emerging market stocks ( (EEM)) and bonds ( (EMB)) is another buying opportunity for long-term investors looking to increase their exposure to emerging markets.


Of course, there are many ways to play emerging markets here like going long the Canadian dollar ( (FXC)) or buying US stocks like Caterpillar ( (CAT)), Deere & Company ( (DE)), Freeport McMoRan ( (FCX)) or just follow Warren Buffett and buy Apple ( (AAPL)).

But China is making people very nervous these days, including the folks at Variant Perception who think it's presenting headwinds to industrial commodities (h/t: Dan Esposito):

If you look at China's Large-Cap ETF ( (FXI)), it's sitting on its 50-week moving average (click on image):

The chart isn't telling me to panic just yet, in fact, it could reverse course and head higher but all that remains to be seen.

One thing I can tell you is emerging market currencies getting slaughtered is actually good for many emerging markets relying on exports for growth. The problem, of course, is rising US protectionism can exacerbate this sell-off.

But there's a limit to what Trump and more importantly, the Fed, can do without risking a much bigger surge in the US dollar, sowing the seeds of the next global financial crisis. If Trump keeps laying tariffs and the Fed keeps raising rates, the US dollar will keep surging to new highs and that could unleash unbearable global pain.

Capiche? So take all this talk of trade wars and the Fed hiking rates a couple of more times this year with a grain of salt. If they continue on this trajectory, it's game over and they know it.

This is why I maintain that in the short run, the surge in the US dollar and sell-off in emerging markets is a bit overdone and we might see a relief rally this summer.

Longer term, however, I see a global slowdown ahead which is why I maintain a more cautious stance, especially in Q4 where we will see the creeping effects of the Fed's rate hikes start to bite.



Also, trade tensions are giving a much-needed boost to defensive stocks like Kraft Heinz ( (KHC)), Campbell Soup ( (CPB)) and other consumer staple stocks ( (XLP)) but if this turns out to a rough and not soft patch, only US long bonds ( (TLT)) will save your portfolio from being clobbered.

One thing I can tell you, it's still a bull market in stocks but you need to pick ‘em well. Have a look at shares of Canada Goose ( (GOOS)) today as it beat on its top and bottom line (click on image):

Its shares have more than tripled over the last year but don't chase this hot stock now (never chase any hot stock or you'll get burned alive!!).

The point I'm trying to make is turn off CNN, FOX, and CNBC, there's a lot of noise out there but in my universe, there are plenty of stocks to trade and some are doing very well (click on image):

So stop blaming Trump for everything, focus here, the market isn't breaking down just yet, there's still plenty of liquidity driving risky shares higher, you just have to pick your spots very carefully and hope the tide doesn't turn anytime soon. And again, don't chase stocks here, any stocks, because you risk being burned!

On that note, enjoy your weekend and please remember to kindly donate to this blog via PayPal on the right-hand side under my picture.

Today, I quietly celebrate my ten-year anniversary. It's been quite a journey and I want to thank those of you who have supported my efforts in every way and helped this blog achieve its success. Writing a daily blog isn't easy, far from it. It takes tremendous discipline, dedication and it's nice to see people appreciate the work that goes into it, so thank you for your support.

I will also ask many of you who regularly read this blog to please donate to the Montreal Neurological Institute here. I was diagnosed with MS exactly 21 years ago and even though it hasn't been easy, I count myself very lucky. The folks at the MNI are doing a great job helping patients with all neurological diseases so please help them any way you can. Thank you.

Paul Tudor Jones, founder of Tudor Investment Corporation and the Robin Hood Foundation, speaks with CNBC's Andrew Ross Sorkin on the market reaction to US talks with North Korea, his forecast for the Federal Reserve and his take on socially responsible investing.

I don't agree with Tudor Jones's forecast on rates but this was an excellent interview, one well worth watching as he discusses many interesting topics and not just markets.

And in an exclusive interview, top-ranked portfolio strategist François Trahan explains the changing market leadership and why it’s predictable. He speaks with Consuelo Mack of WealthTrack. Great interview, I have learned a lot reading François's research at Cornerstone Macro, it's truly fantastic.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
TLT iShares 20+ Year Treasury Bond ETF 120.76 -1.50 -1.23 10,469,693 Trade
EEM iShares MSCI Emerging Index Fund 43.96 0.62 1.43 75,114,612
EMB iShares J.P. Morgan USD Emerging Markets Bond ETF 108.56 -0.10 -0.09 2,893,995 Trade

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