U.S. Markets closed

Markets Run Up Against the Trade Marathon Wall

Robert Burgess
1 / 7

Markets Run Up Against the Trade Marathon Wall

(Bloomberg Opinion) -- The Boston Marathon’s “Heartbreak Hill” has a reputation as the breaking point for many runners. Climbing about 100 feet over less than half a mile, the incline is not particularly steep by marathon standards. The issue is that it comes late in the race, just after mile 20 with the finish line almost in sight. History may show that the stock market ran into its own Heartbreak Hill on Wednesday.

Equities, which were already down on concern about prospects for a trade agreement with China after the U.S. Senate unanimously passed legislation late Tuesday supporting Hong Kong protesters, took another hit after Reuters reported that completion of a “phase one” deal may be pushed back into next year. The latter development drove stocks down by the most in six weeks at one point, showing that investors had become too complacent about a deal, with the S&P 500 Index setting eight records in the last three weeks alone. One of those highs came last Friday after White House economic adviser Larry Kudlow said the night before that after almost two years “we are coming down to the short strokes” on a trade deal. It’s hard to overstate how important an agreement is to the equity market. Stocks have continued to fly higher in the absence of earnings growth, with investors betting that an agreement will lift the cloud of uncertainty hanging over the economy and businesses, allowing profits to start rising again and justifying price-to-earnings multiples seen only once before since the end of the financial crisis. That was at the end of 2017, just before stocks dived 10% over the course of a few weeks in late January and early February 2018.

Stocks did come off their lows of the day as the White House said “negotiations are continuing and progress is being made on the text of the phase-one agreement.” That suggests markets believe that after almost two years of negotiations, the stakes are too high at this point for the U.S. and China not to reach some type of detente. But while the two sides may still reach an agreement soon, the path doesn’t look as if it will be any smoother.

THE SANTA PAUSEBesides trade, about the only other thing supporting the stock market has been the Federal Reserve’s three interest-rate cuts since July. And on Wednesday, minutes of the central bank’s Oct. 29-30 meeting reinforced the notion that it will keep rates low when policy makers next gather to discuss monetary policy in three weeks. “Risks to the outlook associated with global economic growth and international trade were still seen as significant,’’ the minutes said. “The risk that a global growth slowdown would further weigh on the domestic economy remained prominent.” The bond market agrees. After reaching their highest since the end of July on Nov. 8, or 1.94%, yields on benchmark 10-year Treasury notes have turned lower, falling to 1.74% on Wednesday. Also, the so-called yield curve that measures the gap between short- and long-term yields is shrinking again in a sign that bond traders anticipate slower economic growth. The difference between two- and 10-year Treasury yields is at 17 basis points, down from 27 basis points on Nov. 12. The curve was inverted as recently as September, with short-term rates higher than long-term rates in a phenomenon that typically precedes recessions. 

OIL’S UNWELCOME RALLYAlthough trade jitters received most of the blame for the drop in stocks and rally in bonds on Wednesday, don’t discount the big gains in oil prices. Crude jumped as much as 3.69% to $57.25 a barrel in its biggest increase since Nov. 1. Oil prices have now risen about 9% since early October, which is an unwelcome development for an economy that is struggling to gain momentum. The surge wouldn’t be much of a problem if it was due to demand, but it appears to be more the result of shrinking supplies. The Energy Information Administration reported Wednesday that crude supplies at Cushing, Oklahoma, declined by 2.3 million barrels, the biggest draw in three months. Nationwide crude inventories rose 1.38 million barrels, less than reported by the American Petroleum Institute on Tuesday, according to Bloomberg News’s Jacquelyn Melinek. Just last week, the Cass Freight Index for October fell 5.9%, its 11th consecutive year-over-year decline. This gauge tracks freight volumes and expenditures by hundreds of companies in North America. The latest survey noted that the index “has gone from ‘warning of a potential slowdown’ to ‘signaling an economic contraction.’”

CANADA’S ON SALEIn absolute terms, finding bargains in the global stock market is tough. But on a relative basis, the search becomes a bit easier. Consider Canada, where the forward price-to-earnings multiple for the S&P/Toronto Stock Exchange Composite Index is 3.2 points lower than that of the S&P 500. The gap has been this wide only two other times since 2000, in 2001 and 2008, according to the strategists at Richardson GMP. Canadian stocks went on to outperform their U.S. counterparts in 2002 and 2009. Whether that trend continues in 2020 is unknowable, but the latest economic trends out of Canada aren’t encouraging. For the first time this year, the Canadian economy is coming in below analysts’ expectations, according to Bloomberg News’s Shelly Hagan. Citigroup Inc.’s surprise index, which falls when data come in worse than forecast and rises when they do better, dropped below zero this week for the first time since December, suggesting Canada’s economy may be slowing faster than analysts expect. The negative reading follows a series of disappointing economic reports this month including jobs, trade and housing starts. And as Hagan reports, Tuesday’s better-than-expected headline numbers on manufacturing were undermined by a decline in factory volumes and inventories.

BRAZIL’S CURRENCY IRONYIn 2010, when major central banks began devaluing their countries’ currencies by slashing interest rates to near zero — or even below — and printing money to buy financial assets, Brazilian Finance Minister Guido Mantega famously labeled the moves nothing less than a “currency war.” Mantega was concerned that the moves had the effect of making Brazil’s currency too strong, therefore making its economy less competitive. How times have changed. Now, Brazil President Jair Bolsonaro says he’d like to see a stronger local currency, which is hovering close to an all-time low. “I would like the dollar below 4 reais, but it’s not merely a question of domestic issues,” Bolsonaro told reporters in Brasilia on Wednesday. “There’s U.S. and China trade, and the issue is that the whole world is interconnected. Any problem abroad has consequences for the entire world, not just here.” He’s not wrong. Just as too strong a currency can have a negative effect on an economy, so can one that is too weak, mainly by projecting a lack of confidence. So despite the Brazil real having depreciated by about 60% since 2010 to about 4.20 per dollar, the International Monetary Fund forecasts the country’s economy will expand by only an anemic 0.9% this year. A local oil auction flopped earlier this month, frustrating expectations of massive capital inflows that could have propped up the real, according to Bloomberg News.

TEA LEAVESThe Conference Board’s Index of Leading Economic Indicators has a checkered track record, which is why many investors and economists often refer to it as the Index of (Mis)Leading Economic Indicators. The fact is, the majority of its underlying components have already been released by the time the index gets released. Even so, when the Conference Board provides an update on Thursday, the occasion could still be notable. The median estimate of economists surveyed by Bloomberg is for a decline of 0.2%, which would be the third consecutive monthly decline. The last time that happened was from December 2015 through February 2016. Then, like now, there was talk of a looming recession. That never happened, but the economy did slow significantly around that time, expanding just 0.1% in the final months of 2015.

DON’T MISSTwo Risks to Stability Build Amid Short-Term Calm: Bill DudleyTrump and Powell Agree About Monetary Policy: Karl W. SmithSoak-the-Rich Taxes Are Unethical and Unwise: Michael R. StrainWall Street Has Seen the Future, and It’s Here: John AuthersMalaysia’s Window of Opportunity Is Closing Fast: Daniel Moss

To contact the author of this story: Robert Burgess at bburgess@bloomberg.net

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Robert Burgess is an editor for Bloomberg Opinion. He is the former global executive editor in charge of financial markets for Bloomberg News. As managing editor, he led the company’s news coverage of credit markets during the global financial crisis.

For more articles like this, please visit us at bloomberg.com/opinion

©2019 Bloomberg L.P.