Currency war is a race to the bottom--in bond yields
EDITOR'S NOTE
The market is a mess today--the Dow down more than 600 points at the lows, commodities down, gold and bitcoin popping...and the real shocker--are you ready for this?--the 10-year sinking below 1.75%. Yowsa.
The "reason," if we should call it that, is that China's currency sank to more than seven to the dollar overnight--its weakest level in over a decade.
If you listen to the currency guys, they're saying it's not so much that China pushed it lower, but that it allowed it to drop below that key psychological level. In fact, Jens Nordvig on Squawk this morning said his shop picked up on some China buying to support the yuan from dropping even further. (Where is this pressure coming from? Say...capital flight out of disastrous Hong Kong? We'll have more on that.)
Still, China let it happen. In a way, this is actually good for America because it offsets the latest 10% tariffs that the president is imposing September 1. But the president isn't happy: "It's called 'currency manipulation'," he tweeted. "Are you listening Federal Reserve?"
Now, as Larry Kudlow has said time and again, President Trump--and others advising him--think that other nations are playing unfair and gaining an advantage on the U.S. by artificially lowering their currencies.
If the president wants to do something about this--he can, through the Treasury. It's actually up to him to make the call on currency intervention, not the Fed, which cut rates last week only to see that backfire in the form of a dollar rally.
This is where it gets really interesting--and scary--for the bond market. We already have global yields at extremely low levels. Germany's sovereign debt has negative yields now all the way out to thirty years. A quarter of sovereign and corporate debt globally already trades at negative yields now. A quarter!
And now you have China probably having to buy more dollars--i.e. Treasuries--to keep its currency from sliding further and sparking massive capital outflows. If the U.S. now were to weaken the dollar, well, historically it has done that by buying Japanese and German currencies, i.e. bonds.
So China's buying U.S. debt, the U.S. could be buying Germany's already negative debt, etc., etc. As Nordvig put it earlier: "The currency effects of all that could just net out to zero, but you end up with a lot of bonds being bought."
No wonder global yields have plunged again today. Undoubtedly, a lot of strategists and algos interpret this as a bearish signal for the stock market--which I'm not sure makes a ton of sense. The only new bearish macro information we've gotten today is the drop in the ISM non-manufacturing survey, which fell to its lowest level since August 2016 (there's that 2016 comparison again...).
Bill Miller says he sees a lot of stocks that are attractive here: Amazon; the big banks (J.P. Morgan, Bank of America, Citi); and some hated names like ADT and Teva.
More at 1 p.m.! I'll see you then...
Kelly
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