Pro Perspectives 8/7/19

August 7, 2019

The global interest rate market continues to price in the worst-case scenario.  

What's the worst-case scenario?  An indefinite trade war, and one that likely ends up with China in the penalty box, not just with the U.S., but with global trading partners.  And an isolation of the Chinese economy would likely lead to a global military war.  

That's what $15 trillion of negative yielding global sovereign debt is telling us. 

So the interest rate market is taking signals from the trade war

Global central banks are taking signals from the interest rate markets (not the other way around). 
So who is sending the signals on the trade war?  Trump.  And with the confluence of recent moves (Trump's threat of additional tariffs, China's currency response, and Trump's charge of currency manipulation), those signals have looked more ominous.  That triggers more global capital flows into sovereign bonds (namely Treasuries).  

The question is, has Trump lost his leverage to do a deal (even with concessions) with China?  

The markets have voted 'yes,' he has lost leverage, especially after taking the charge of currency manipulator to the WTO.   But contrary to most of the viewpoints we heard yesterday, China does have more to lose under the charge of 'currency manipulator.'  The WTO is forced to make a judgement on the charge, which means China's other global trading partners are forced into the China-trade-war fray.  That has given Trump leverage

In the meantime, we have two paths that are positive for stocks: 1) Global rates going even lower, forces capital that requires return into stocks (as we saw in the post-financial crisis environment).  2) Trump withdraws his charge against China and does a deal, stocks boom.

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