Stock Market is Rattled Amidst Trade War

August 8, 2019
“I will tell you how to become rich. Close the doors, be fearful when others are greedy. Be greedy when others are fearful”
― Warren Buffett

5-Day Change

  • Bitcoin: $11,880.30
  • Ethereum: $224.55
  • S&P 500: $2,884.00
  • Dow Jones: $26,007.10

Bitcoin Has a Golden Shimmer

Satoshi’s cryptocurrency has come a long Bitcoin starts to gain the attention usually paid to gold, thanks to its emergence as a would-be safe haven asset though not everyone agrees. Still, the venerable cryptocurrency has come a long way since ‘It’s all a scam’ days, and mainstream financial news seems like they’re moving past their initial suspicion of the technology. However, all this attention hasn’t quite sparked the gold rush - Bitcoin is still struggling to sustain gains above the $12,000 mark.

Does this mean Bitcoin has found its niche? Not as a currency, but as a safe-haven asset? It’s a nice idea, especially as gold prices and bitcoin have been in lockstep for the past three months. The shift from currency to bullion makes sense considering Bitcoin’s economics: 

Like gold, Bitcoin is hard to use for purchases, hard to store, and deflationary, making it bad as a currency, but great as gold.

If it’s gold, why not stockpile? First and foremost, HODL is a meme, not a serious trading strategy. At the same time, Bitcoin has seen explosive appreciation from 2011 to now, a rise of approximately 247,617% over eight years. So HODLing seems viable. However, recent events, like the 2017 peak and subsequent reversal have shown that while in theory, Bitcoin’s price horizon is unbounded, in practice, peaks and momentum are hard to sustain.

This week’s price movements are a perfect example: A flash crash took the crypto from $12,200 to $700 less over the course of only two hours, with $600 of that loss occurring over the course of 50 minutes. Unlike gold, Bitcoin’s price movements are mostly unregulated and are very susceptible to trading algorithms. Additionally, HODLing makes no sense in an environment where the price can retrace back thousands of dollars - a potential consequence if Bitcoin is unable to break $11,700.

Wut We Think: While this isn’t exactly an original sentiment, Bitcoin is finally breaking through into the mainstream - though as a gold-analog instead of a dollar-crusher. And mainstream financial analysis is coming around to that notion, with significant price appreciation on the horizon. The network, the fundamental of Bitcoin, is stronger than ever, with 100,000 new miners expected to come online. In the short-term, however, Bitcoin remains at the mercy of conflicting trends - expect a pullback if this week’s uptrend doesn’t hold out.

China's Yuan reached its lowest price in a decade

Blatant currency manipulation is one way to fight back in a trade war...especially when you’re the world’s leading exporter. And that’s exactly what China did on Monday, adjusting the price of the Chinese Yuan against the dollar down to the lowest level since 2008 in response to US President Donald Trump threatening to levy a 10% tariff on $300 billion worth of goods (including Nike Shoes and Apple’s iPhones.) 

What does the price drop mean? For starters, it takes a bite out of the tariffs already in place, by making Chinese exports more attractive to US importers. On the other hand, this means that prices for foreign goods rise for Chinese consumers, and a weak Yuan accelerates capital flight (though that may be good for Bitcoin). The SSE Composite crashed 3.0% on news of the slipping Yuan, and investors are pulling money out of China. 

Will the Yuan fall further? It seems likely, especially if even further tariffs are threatened, though the lower the Yuan is set, the more ammunition the United States has for crying foul. That said, it’s unlikely to go much lower - keeping balance in China’s domestic markets has become a priority after the disastrous events of 2014-2015 following a similar downwards Yuan price adjustment.

So who’s winning the trade war? No one wins in a trade war. While that may seem trite, trade wars are inherently destructive for all sides - especially a trade war between the two largest economies in the world. And some of the points put out on one side or the other are misleading - like the claim that ‘China pays for tariffs.’ US importers pay for tariffs, so tariffs generally serve as an incentive for firms to purchase domestically, which has resulted in a $31 billion reduction in Chinese exports. But at the same time, Chinese state-owned firms have been instructed to stop purchasing US agricultural goods, which has required the US government to provide subsidies to the tune of $29 billion to US farmers.

Wut We Think: There’s not a lot of light during a trade war (mostly politically driven), and not a lot of room for investors to maneuver. The US and China are both economic powerhouses, and while China’s moves seem mostly to preserve the decades-old supply links between itself and the US, the US’ moves are far more volatile and arbitrary. Hopes rest on the ongoing trade talks, but they may stretch out to the 2020 US Presidential election. All in all, there’s a lot more volatility - and damage - ahead.

Stock Market is Rattled Amidst Trade War

Even the rich aren’t getting richer during this trade war...though they’re still richer than most people can dream. But the wealthiest 500 people on the planet lost about $117 billion, or about 2% as a result of a stock dip on Monday. The dip itself occurred in tandem with news that the Chinese Yuan had slipped to the lowest point against the US dollar in a decade, as well as fears that the trade war will continue to reap victims.

How much did stocks really fall? While the two biggest benchmarks, the Dow Jones and the S&P 500 have managed to claw back some gains, the Dow did fall 2.3% on Monday, and the S&P closed 3% lower. In fact, all major indices suffered losses on Monday, a direct result of shots being traded in the US-China trade war.

But have they recovered? Some have. The Dow has gained 1% in early morning trading on Thursday, and the S&P grew 0.06%, the weekly picture is a bit worse, with the Dow and S&P losing 2% and 2.5% since the start of the week respectively. Monday’s loss was the worst of the year, though there are some signs that stocks will stabilize in the coming weeks. 

Is there any good news at all? You have to do a bit of digging, but the US-China trade relationship isn’t the only driver of the global economy, despite what markets may think. Fundamental economic metrics for the US, like the unemployment rate, is at its healthiest level in decades. But bond yields have gone up, and central banks around the world are cutting rates to protect their economies from the damage. But that doesn’t solve the real problem for consumers - rising costs - which the trade war is only going to exacerbate. 

Wut We Think: The overall picture may be disappointing, but there are ways to get around it - invest in companies without exposure to the trade war. For example, while tech stocks as a whole are down, that big picture is missing the trees - Apple is the only FAANG name with serious exposure to China, while Facebook, Netflix, Google are all at nearly zero, not to mention Microsoft, which recently posted stellar Q2 earnings. All in all, there’s always the opportunity for profit even in the most volatile of markets - one just has to know where to look.

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