2 Safe Havens for the Ongoing Trade Storm - Trade Stocks

2 Safe Havens for the Ongoing Trade Storm

By Fri, May 10, 2019

Last weekend, President Trump tweeted that he planned to raise the tariffs on $200 billion of Chinese goods from 10% to 25%. The higher tariff would affect thousands of Chinese imports, such as electronics, furniture, auto parts, clothing, luggage and bicycles.
Today, the administration made good on that promise.
The back-and-forth in markets this week showed investors struggling to make sense of the U.S. and China trade negotiations.
On the surface, it’s too easy to see the dispute as a finite set of squabbles. But this trade war is bigger than tariffs. Much bigger. It’s really about technological and financial dominance over the next few decades.
Jack Ablin of Cresset Capital in Chicago observes that the U.S. is handicapped in this effort. For example …
  • Our nation’s ethical policy framework sets guidelines on U.S. stem cell research and cloning. China is unconstrained by such measures, he notes.
  • The U.S. government cannot own companies directly, as China does, to help drive research outcomes in technology, healthcare and alternative energy. Indeed, Jack points out that China’s alternative energy initiatives helped them dominate the solar industry: The country generates more than 130 gigawatts of electricity using solar power, double the U.S. output.
Given the breadth and depth of the issues between the two nations, Jack argues that America’s dispute with China cannot be resolved quickly or easily. In fact, he can envision a scenario in which certain tariffs remain in place indefinitely despite an interim agreement.
A further breakdown in talks would take its toll on equity markets.
Whether an ensuing pullback would be an opportunity or a threat would depend on liquidity trends. For now, Jack’s research shows that liquidity levels are fine, as evidenced by lenders’ willingness to extend credit.
If markets reel, it’s fair to take comfort in the White House’s desire to spur a rally going into the 2020 election season. The president has many levers to pull in fiscal and monetary policy to make that happen. And he might have to pull them all.
Gold, Yen: Safe Havens in a Trade Storm
The rally in safe-haven trades like gold and the yen amid the global sell-off suggests that investors are quite concerned about a renewed escalation of trade tensions.
Irrespective of how trade negotiations eventually play out, analysts at Capital Economics think the yen and gold will advance this year as the U.S. economy slows sharply and the rest of the world remains weak.
Since the president’s late-Sunday tweet, triggering a sharp sell-off in global equities, the price of gold has edged higher and the Japanese yen has rallied against the U.S. dollar.
But that’s not the end of the story.
Even if the U.S. and China reach a deal, risky assets like equities may continue to fall out of favor as a result of a slowdown in the global economy. If so, then the yen-gold trade — buyable through the ETFs Invesco CurrencyShares Japanese Yen (FXY) and SPDR Gold (GLD) — will have more running room.

CapEcon analysts note that over the past 10 years, during stretches when the S&P 500 has fallen by at least 5%, the Japanese yen has on average appreciated by 4% against the U.S. dollar, while gold has risen by nearly 2%.

In addition to safe-haven demand, gold and the yen ought to benefit from looser monetary policy in the United States. The analysts note that since gold bears no interest, it tends to rise when Treasury yields fall, as they are on track to do this year. Technically gold has upside to at least the $1,400/ounce area this year, which would be a 9% advance from the current level around $1,285/ounce.

The fake-outs, dekes and feints in this episode of the presidential reality show are even shakier than usual.

At the moment, this month has the distinct aroma of last October, which was a drag. But my friend Tom McClellan — one of the world’s leading technical analysts — has an optimistic view.

Here is an upbeat note from him that he sent Wednesday night:

“If you want … . a really bullish argument, consider are in the third year of a presidential term, which is historically a bullish period for stocks. And the prior period showing the strongest resemblance to the current market action was “President Clinton’s first term in 1995 … a long, linear, low-volatility uptrend. There was the traditional May dip in 1995, with the S&P 500 dropping 1.7% in just 3 days to a low on May 19, 1995.

“Afterward, the S&P 500 went back to screaming higher, on the same upward slope that had existed before. This week is another three-day drop, albeit earlier in the month of May than the 1995 episode, but still basically in the character of that May 1995 dip.

“So if we really are replaying the 1995 script, then the uptrend should resume itself. That is the big bullish argument.”

OK then. Hope that works out. We’ll know soon enough.

Best wishes,
Jon D. Markman

 

About the Author

Jon D. Markman is the editor of the Tech Trend Trader and Power Elite equity research services at Weiss. He also publishes two options trading services and two futures trading services at his own research firm, Markman Capital Insight, in Seattle. Markman leverages three decades of experience, wide-ranging contacts throughout the global investment industry, a passion for quantitative finance and an eye for value that is informed by voracious, eclectic reading. A pioneer in the development of stock screening software, Markman is co-inventor on two Microsoft patents, the creator of the popular StockScouter equity rating service at MSN Money, and author of the best-selling books “New Day Trader’s Advantage,” “Swing Trading,” “Online Investing” and “Reminiscences of a Stock Operator: Annotated Edition.”