[Heard on the Street] 20181008-20181014

Tariff 

White house uses tariffs differently with China than with other nations. Tariffs on China aren't a short-term strategy.

While the White House is progressing on leveraging trade deals with allies in Canada, Mexico, Korea, and Europe, its dispute with China looks increasingly intractable. 

For U.S.-China, Tariffs aren’t simply a negotiating tactic for the U.S., but a way to change economic incentives. Using tariffs to make it more expensive for companies to export from China, will encourage foreign firms to take their know-how out of the country. 

Tariffs between the world’s two largest economies are likely cemented in place for years. The latest round of U.S. tariff on $200 billion of Chinese goods took effect last month. At the beginning of next year, the Trump administration plans to raise the tariffs from 10% to 25%.

The White House is moving ahead with plans for President Trump to meet with Chinese leader Xi Jinping at a multilateral summit in late November. This dialogue tries to devise a way out of the trade battle shaking markets and poisoning relations between the world’s two largest economies. China has been hoping such a meeting could provide an opportunity for both sides to try to ease the escalating trade tensions. 

Central Bank 

The central bank has handled the current easing cycle well while leaving deeper problems unresolved.

China's central bank said it would reduce commercial banks' reserve-requirement ratio by 1 percentage point, from 15.5% to 14.5%, effective Oct. 15.

The cut will free up 1.2 trillion yuan in total. 450 billion yuan will be for banks to repay short-term debt coming due this month and 750 billion yuan will be released into the financial market. 

Chinese leaders are eager to get ahead of any potential economic impact of the trade spat and boost confidence in a flagging stock market. Stocks in Shanghai have sunk about 15% since the beginning of the year, while the yuan has weakened by more than 9% against the U.S. dollar since mid-April.

U.S. economic 

1. Labor 

Friday's payrolls report showed continued strength in the labor market. The headline (U-3) unemployment rate dipped to the lowest level since 1969. Yearly pay increases for "production and nonsupervisory" workers hit the highest rate since the recession.

2. CPI

Used car, whose price fell 3% on the month, is the key components dragging on CPI in Sep.

3. Holiday sales

The National Retail Federation is forecasting robust holiday sales this year with a 4%+ increase from 2017.

4. Housing 

West Coast's hot property markets are seeing a jump in housing inventories.

Bond

1. Bond Yield

The central bank sees broader forces—declining unemployment, inflation's return to normalcy and a fast-growing economy— pushing bond yield higher. The 5-year Treasury yield is now firmly above 3%. The 10-year yield is nearing 3.25%. The treasury curve has become steep.

The tightened financial conditions push up the bond yield and credit spread, as well as the Financial conditions index.

The rise in bond yield reflected heightened expectations for further interest-rate increases by the Federal Reserve, which would likely draw even more international capital to the world’s largest economy. The Fed has already raised rate 3 times this year.

On Thursday, Treasury yields eased back a bit in response to the sharp selloff in the stock market.

There is a growing recognition among investors that the Federal Reserve won’t be as ready to dial back its plans to increase rates if stocks run into trouble. Moreover, while the central bank certainly is paying attention to inflation numbers, it is more focused on how tight the job market is getting. So long as unemployment keeps falling it is unlikely to stop raising rates.

2. China's Bond Sale

China has launched a multibillion-dollar bond offering to investors outside the country, expected to raise $3 billion in total. This sovereign-bond sale will be the country’s third practice since 2004. The maturity includes 5, 10 and 30 years; interest rates will be 0.5 to 0.9 percentage point above yields on U.S. Treasuries. Investors remain confident in China's government credit, allowing the nation to issue dollar bonds at an attractive rate.

Stock

An overview of the global stock market:

1. U.S. stock

BLACK WEDNESDAY: U.S. stock drop as bond yield keep climbing

On this black Wednesday, the Dow Jones Industrial Average plunged more than 800 points Wednesday. Tech stocks in the S&P 500 fell 4.8% to lead the broad index lower, the sector’s worst day of trading since 2011. 

Trump: "I think the Fed is making a mistake. They’re so tight. I think Fed has gone crazy."

A measure of stock-market volatility, the CBOE Volatility Index, surged to its highest level since February. Below are some updates on market volatility measures.

As stocks fell further from their record highs, bond yields resumed their climb higher. The yield on the 10-year U.S. Treasury note rose to 3.211% from 3.208% a day earlier. If bond yields continue their torrid climb, there will be further pain for the stock market.

Meanwhile, tech shares especially semiconductor firms plummeted since rebuilding supply chains due to tariffs and the risks of China's spying will be disruptive and expensive. And with tech under pressure, growth stocks as a whole have been underperforming value in recent days. Netflix down 9.7% over two days, Amazon.com off 8.1% and Apple 5.5% lower.

Till Friday, the S&P 500 tumbled 2.1%, and the technology-heavy Nasdaq Composite lost 1.3%, closing down nearly 10% from its Aug. 29 record close of 8109.69. Those indexes are on track for their worst week since March—though the S&P 500 is still up more than 2% for the year.

The chart in below suggests that: recently there is a change from normal. The trend in 10 yr treasury yield is no longer consistent with the cyclical-defensive return spread as previous years. In contrast, after the turning point, the higher Treasury yield is, the smaller return spread will be. 

[note: cyclical stock refers to those whose performance consistent with economic cyclical; defensive stock refers to those can provide stable return under various market conditions]

The stock declines left many investors anxious heading into the third-quarter corporate earnings season, which kicks off in earnest Friday with big banks including JPMorgan Chase & Co. and Citigroup Inc.

But on Friday (Oct 12), U.S. stock rebound after the 2-day rout, capping a turbulent week with daily gains after a rebound in technology companies and some better-than-expected third-quarter results. 

With earnings season underway, a renewed focus on corporate results should help support stock prices in the near term. Corporate profits are widely expected to rise in the third quarter, and many investors said that could help provide a bottom for the stock pullback. [But these investors say earnings season doesn’t guarantee good news: Earlier this week, tools distributor Fastenal Co. reported a stronger-than-expected profit, but its shares fell as executives spoke of higher costs due in part to tariffs].

2. Aisa Stock

A sharp selloff in U.S. stock spilled over into Asian and European markets, with technology stocks from the U.S. to China falling the hardest, as investors refocused on slowing global growth, rising bond yields and increasing trade tensions.

Chinese stocks suffered their worst day in more than three months, as traders and investors returned from a weeklong national holiday and caught up to a global sell-off that has dragged down many emerging markets.

The benchmark Shanghai Composite Index fell 3.7% on Monday, its biggest single-day loss since June 19. Its smaller and tech-heavy counterpart in Shenzhen fell 3.8%.

To some market participants, the weak sentiment was further evidence of deep investor pessimism within the country at a time of slackening growth, in part because of the effect of the U.S.-China trade conflict on domestic manufacturers.

Another factor in Chinese markets was last week’s 4.4% drop in Hong Kong’s benchmark Hang Seng Index, which includes many large Chinese companies. Indexes in South Korea and Japan shed around 4% apiece.

Similar as U.S. stock, Chinese stock rose on Friday in a volatile trading session as investors reassessed the impact of the U.S.-China trade spat on the country’s economy and its markets. The Shanghai Composite rose 0.9% after earlier falling as much as 1.8%. The tech-heavy Shenzhen market was 0.2% higher after earlier tumbling as much as 3.1%. However, for the Chinese market, investors would like to see more potent measures such as deeper tax cuts and other reforms but they remain absent.

Indexes in South Korea and Hong Kong gained 1.5% and 2.1% Friday, respectively, while Japan’s Nikkei 225 index rose 0.5%.

Commodities

1. Oil

a hot streak in the oil market is setting off a wave of bets of how prices can go. Brent, the benchmark for global crude prices, has soared 26% this year to $84.16, while West Texas Intermediate, the reference price for U.S. crude, has risen 23% to $74.34.

With crude prices rallying for four straight weeks of gains, trading of oil options has surged.

2. Gold

After languishing for most of the year, prices for the haven metal notched their biggest daily gain since June 2016 on Thursday, climbing 2.9% as global stocks extended their losses. Prices now stand at their highest level in two months.

Currency

F/X forwards continue to point to a weaker yuan ahead. Beijing is keeping offshore yuan liquidity tight to lessen "speculative" selloffs.

Others

Trian Fund Management is evaluating a takeover bid for Papa John’s International.

SoftBank Group is in talks to take a majority stake in WeWork. The investment could total between 15 and 20 billion and would likely be made by SoftBank's $92 billion Vision Fund.

Google revealed private data of hundreds of thousands of users of the Google+ social network then opted not to disclose the issue this past spring, fearing regulatory scrutiny and reputational damage.

Noble prize in economic science was shared by Americans William D. Nordhaus and Paul M. Romer for work on the interplay of client and the economy.

The Kavanaugh's Supreme Court confirmation battle is firing up midterm campaigns. In a 50-48 vote, the Senate confirmed Brett M. Kavanaugh, cementing a conservative majority on the nation’s top court. 

Sears Holdings is preparing to file for bankruptcy. It is inching closer to a deal with lenders about a bankruptcy plan that would close at least 150 stores and provide a lifeline loan to keep a small footprint of around 300 locations open

A Chinese intelligence operative arrested in Belgium has been brought to the U.S. to face charges that he conspired to steal trade secrets from GE Aviation and other companies.

Tencent Music Entertainment Group is postponing its initial public offering until at least November because of the selloff in global markets. Tencent Music was expecting a valuation between $25 billion and $30 billion.

Ant Financial’s Alipay, the operator of one of China’s top two mobile-payment apps, said hackers have taken an unknown amount of money from accounts using stolen Apple IDs. 

Mortgage rates hit their highest level in more than seven years this week at nearly 5%, which could deter many home buyers and which represents another setback for the slumping housing market.