S&P 500 is boxed in to a corner

Yuan fixing sends a message

PBOC changed its daily yuan reference rate more than expected overnight to stabilize the market. China is actively using the currency to offset headwinds from additional US tariffs. It shows China’s determination to continue to fight the US in this prolonged trade war that continues to throw volatility into markets. The weaker Chinese currency is hitting emerging market equities the most as Chinese equities are the biggest component (32.2%) in the benchmark index. Emerging market equities are down 7% in Q3 compared to 3.5% for developed equities.

Chinese equities naturally rallied on the weaker currency as it lifts growth prospects at the margin. For local investors the weaker currency creates short-term momentum for foreign investors it’s not a delightful development and Chinese equities in USD terms have also struggled since the peak in April.

KOSPI 200 is still in bear market

The leading equity index in South Korea, KOSPI 200, is still in a bear market down 26% from the peak in early 2018. Contrary to the MSCI World Index, KOSPI 200 is down for the year and has lost a staggering 8% in local currency the past month indicating no relief in the global economy.

For more than a year we have extensively been highlighting South Korea as a good proxy for how Asia and in particularly China’s economy is doing. Exports to China are stabilizing but still weak compared to a year ago. South Korea’s exports to China have not moved much in the past five years. Instead of interpreting this as weak Chinese economy for five years it is likely tied to China’s efforts to build up its own semiconductor and automobile industry slowing the needs for imports from South Korea.

Adding more salt to the wound, South Korea’s consumer confidence index fell to the lowest point since January 2017 and is now at levels not seen since 2009.

Chicago Fed National Activity Index

The most broad-based coincident indicator (tracking 85 time series) on the US economy is the Chicago Fed National Activity Index (CFNAI). July number was published yesterday and showed an ugly turn lower in July just as economists believed the US economy was firmly rebounding from April’s low point. 

CFNAI continues to paint a picture of the US economy operating below trend growth although stabilizing somewhat. But the indicator stands in sharp contrast to picture delivered by the US President. The USD liquidity squeeze in global financial markets combined with the US economy operating below trend growth and no imminent inflationary pressures warrant lower rates which we believe the FOMC will deliver over the next two months.