Stocks traded off again today, amid the mounting global concerns. The Dow was down 391 points and closed at 25,896. Driving the selloff were the primary elections in Argentina, continued trade concern with China, coupled with the current protests in Hong Kong which cancelled all flights out of their airport. This uncertainty has money fleeing to bonds which raises bond prices and decreases bond yields and flattens out the yield curve. This has a compounding effect, because as the yield curve flattens out it makes investors more fearful of recession, which then causes more money to go to bonds for safety ultimately causing the yield curve to flatten out even more. Right now, it seems like the concern for U.S. stocks is due mostly to their limited potential as a result of the current international environment, and not what is happening within the U.S. economy.
An interesting article in the South China Morning Post, talked about how the ZTE deal from last year is affecting trade negotiations now. In the first half of 2017, Trump placed a seven year ban on ZTE because they were selling products to Iran and North Korea. The ban would have effectively put ZTE out of business, costing the Chinese workforce 75,000 jobs, which prompted President Xi to call President Trump and strike a deal that would lift the ban. The two leaders agreed to have ZTE pay a $1.3 billion fine, replace their executives, and the most critical piece, hire American compliance executives to monitor every action the company took. This agreement gave the U.S. the confidence to ask for similar terms regarding trade. Not just the ability to punish China should they not follow the agreement, but also for China to allow the U.S. to have a Beijing compliance office to monitor if the trade deal is being properly enforced. From China’s perspective, they view these terms as similar to the terms that were made in the past with other Western colonial powers. In retrospect, China now wishes they would have let ZTE file bankruptcy, had the pieces sold off to other Chinese companies, and then retrained the workers. To China, the ZTE deal is now viewed as a humiliation and they do not want to agree to similar terms with trade. It will be interesting to see what concessions get made.
Argentinian stocks/ETFs and the Argentinian peso traded way off after pro-business President Mauricio Macri had a terrible weekend as he lost a primary election by 15%. The ETF tied to Argentina, was down at least 20%, and the peso was down at least 15% as there were fears that many of the painful, but necessary, reforms might go away. President Macri lost in the primary to Alberto Fernandez and his running mate, former President, Christina Fernandez de Kirchner. If the team of Fernandez and Kirchner win, Kirchner will be either first lady, president, or vice-president for 16 of 20 years. Her husband was president from 2003 to 2007, then she became president for the next 8 years, and now she would be back again for another 4 years, making the Clintons look like political amateurs!