What was once a peaceful week with an upside bias turned ugly on Friday as President Trump announced new 100% tariffs on imports from China (see below). If the past is prologue this move the Trump is more than likely a negotiating tactic rather than a long-term strategy. If that is the case, after perhaps a few more volatile days, the financial markets should settle down. That said, a lasting trade deal with China is probably going to be the most elusive as the two superpowers have a lot at stake which, in turn could result in a longer period of market tumult. Either way, at this time we believe that the pullback will most likely be buyable.
- In response to China tightening controls on the exports of rare earth, President Trump announced that the administration was levying tariffs of 100% on imports from China “over and above any Tariff that they are currently paying,” beginning November 1. According to the Chinese Ministry of Commerce, in order to safeguard national security and interests, it has decided to “implement export controls on rare earth-related technologies and other items.” Presently, China controls approximately 70% of the global supply of rare-earth minerals, critical for the high-tech industry, to include defense. As noted above President Trump was quick to respond with the tariffs, posting on Truth Social, ““they are becoming very hostile, and sending letters to Countries throughout the World, that they want to impose Export Controls on each and every element of production having to do with Rare Earths, and virtually anything else they can think of, even if it’s not manufactured in China,” after which stocks pulled back and the CBOE S&P 500 Volatility Index (^VIX) spiked.
- According to Apollo Global Management, “US workers contribute on average around $8,500 to their 401(k) accounts every year, and with 71% of 401(k) assets allocated to equities – and the Magnificent Seven having a weight of almost 40% in the S&P 500 – the bottom line is that each worker in the US puts an estimated $2,300 into the Magnificent Seven stocks every year.”
- During an interview on CNBC, hedge fund titan Paul Tudor Jones stated that “my guess is that I think all the ingredients are in place for some kind of blow off. History rhymes a lot, so I think some version of it is going to happen again. If anything, now is so much more potentially explosive than in 1999.” Jones also expects that the bull has more room to run. “It will take a speculative frenzy for us to elevate those prices. It will take more retail buying. It’ll take more recruitment from a variety of others from long short hedge funds, from real money, etc.” We agree.
- Shares of chipmaker Advanced Micro Devices (AMD) surged this past week after OpenAI announced a “6-gigawatt agreement to power OpenAI’s next-generation infrastructure across multiple generations of AMD Instinct GPUs.” The press release from OpenAI went on to state that “OpenAI will work with AMD as a core strategic compute partner to drive large-scale deployments of AMD technology.” Expect more of these partnerships as spending in AI continues to ramp.
It’s The Economy…”
- The Federal Reserve reported that Consumer Credit outstanding rose $0.4 billion during August, after rising $18.1 billion during July. Analysts had expected Consumer Credit to rise by $14.0 billion. Over the past year Consumer Credit has risen 2.0%. Non-revolving Credit(automobiles, consumer durables and student loans), which accounts for nearly two-thirds of total consumer credit, rose $6.3 billion during August (1.8% y/y) while revolving credit(credit cards) contracted $6.0 billion (2.6% y/y). Importantly, consumer credit as a percentage of disposable income shrank to 22.0% during August from 22.1% during July versus 22.8% one year ago. (Source, U.S. Federal Reserve)
- Mortgage Rates Fall. Recently released data from the Federal Home Loan Mortgage Corporation (FreddieMac) revealed that the average rate on a 15-year mortgage declined two basis points to 5.53% while the rate on 30-year mortgages fell four basis points to 6.30%. According to Freddie Mac, “over the last few weeks, mortgage rates have settled in at their lowest level in about a year. There is growing evidence that homebuyers are digesting these lower rates and gradually are willing to move forward with buying a home, which is boosting purchasing activity.”
Economic Reports scheduled to be released this week assuming a resolution of the budget impasse, include the following – on Wednesday, Retail Inflation as Measured by the Consumer Price Index (CPI); on Thursday, Wholesale Inflation as Measured by the Producer Price Index (PPI), the Weekly Report of Initial Claims for Unemployment Benefits, September Retail Sales and August Business Inventories; and, on Friday September Housing Starts, September Industrial Production and September Capacity Utilization.
Several companies of note are scheduled to report quarterly earnings this week, to include JP Morgan (JPM), Johnson & Johnson (JNJ), LVMH (LVMUY), Wells Fargo (WFC), Goldman Sachs (GS), Blackrock (BLK), Citigroup (C), Abbott Laboratories (ABT), Morgan Stanley (MS), ASML Holding (ASML), Bank of America (BAC), Taiwan Semiconductor (TSM), PNC Financial (PNC), Charles Schwab (SCHW) and American Express (AXP).