How Donald Trump and Twitter Took Down the Markets

Unless you’ve been living under a rock, you would’ve seen that US President Donald Trump sat down and had a two-hour meal with Chinese President Xi Jinping while they were both in Argentina attending the G20 Summit last weekend.

In that meeting, both presidents agreed to a cease fire for the next 90 days regarding tariff increases.

So, how did the markets react globally?

Well as you might expect, they soared.

The Asia Pacific region, which includes Australia, reacted first to the news.

Here at home, the ASX 200 had its biggest one day rise in two years, since 10 November 2016. It rose by 1.84%, adding 104 points.

Across the Pacific, the Asian markets rallied after the truce between the US and China were announced.

Japan’s Nikkei 225 was up 309.74 points, or 1.39%. China’s CSI 300 was up 3.13%.

If we turn to the US and European markets, confidence was also clear, with markets soaring when they closed on Monday their time.

On Wall Street, the Dow Jones index was up 263 points or 1%. NASDAQ soared even further, up 1.3%.

And the S&P 500 gained 0.9%.

But it wasn’t only markets that went up, Brent crude also rallied. Rising 4% to US$69.19 a barrel.

In Europe it was a similar story.

In London and Paris, both their benchmark indices spiked over 1%.

While Germany’s DAX rose by 1.9%.

So with all these markets up at the beginning of this week, does that mean that for the next 90 days markets globally will continue to rise?

Well it doesn’t look likely. If you had asked the question on Tuesday, we would’ve said that for the next 23 days of 2018 could see the markets rally. Most markets around the world were up.

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But then Wednesday morning our time, that all changed.

Tariff Man goes on a twitter rampage

Over in the US, President Donald Trump decided, like he often does, to use Twitter as his platform to explain himself. Except this time, it sent rallying markets crashing.

The self-proclaimed ‘Tariff Man’ had this to say about his plans to place tariffs on nations just days after calling a truce to the US­-China trade war. Here’s the tweet that sent markets crashing below:

MoneyMorning 08-12-18

Source: Twitter

[Click to open in a new window]

All of the investor confidence gained by the truce was immediately wiped out and more.

To gain a better perspective of what this tweet actually did to the markets, we’ll take a quick look at the figures:

The US markets were hit the hardest, with the Dow Jones falling close to 800 points or 3.1%.

The benchmark S&P 500 fell more than US$820 billion (AU$1.1 trillion), that means a loss of 3.2%.

The hardest hit index in the US was the NASDAQ. It plummeted 3.8%.

In Europe, it was all red. The FTSE 100 fell 0.56%, and Germany’s DAX closed down 130.14 points, or 1.14%. And the Euro Stoxx 50 index finished down 25.74 points, or 0.80%.

And in the Asia Pacific, stocks also felt the brunt of Trump’s words. Japan’s Nikkei 225 was down 189.63 points, or 0.86%. China’s CSI 300 was down 0.04%.

And on Wednesday, the S&P/ASX 200 at the close was down 54.14 points, or 0.95%.

Very different from the results at the beginning of this article.

So what does this all lead to? 

A recession is looking quite likely

It wasn’t only Trump’s tweet that sent the markets into a panic.

When we look at US bond yields, it is evident that they are at their narrowest in more than a decade, between the two and 10-year yields.

For yield for two years bonds (short-term) rose to 2.8%. That surpasses the five year bonds, sitting at 2.7%. In regards to long-term bonds, these rates are usually higher, representing room for growth within the economy. Currently, that isn’t the case. 10-year yields are 2.92%.

The last three times the spread has been this narrow, the US has gone into a recession.

This was backed up by a statement from Binky Chadha, the chief strategist at Deutsche Bank:

Historically there is a good correlation between the yield curve inverting and the timing of the next recession and the bond market has been a big focus for today.’

While the US may be headed for a recession, what does Australia’s own economic outlook look like?

Well, it’s not looking good. On Wednesday, Australia’s economic growth figures were released, and it was harsh.

A Reuters poll came to the conclusion that Australia’s economic growth would slow to 3.3%, down from 3.4% the year before.

But instead, the figure is much more alarming, the economy slowed to only a 2.8% growth.

As the ABC reports, this result could mean that the RBA will keep interest rates as is, not trusting the economy is strong enough reason to endure a rise.

As we see markets and economies, including our own, struggling, investors should look at protecting their investments.

Controversial economist Harry Dent’s Boom & Bust Letter may just have the information you need to potentially protect your wealth. Go here to check out what he has to say regarding a US and in turn Australian recession.

This week in Money Morning

In Monday’s Money Morning, Harje explains that just like every other commodity, demand for labour rises and falls depending on price. If labour costs more, employers demand less of it. This is exactly what happens when you enforce minimum wages. Demand for labour drops. There’s an oversupply of employees and employers hire those with education and experience. So rather than giving the poor a decent standard of living, minimum wages push them out of the labour market. And it keeps them out. To find out more about what Harje thinks of the labour market and the minimum wage, go here.

In Tuesday’s Money Morning, Harje looks at how trade between the US and China isn’t fair. It’s not as if American consumers and businesses buy American first. They, like everyone else, vote with their dollars. And the cheap goods are produced over in China. China’s currency manipulation and cheap labour have ensured their exporter status. US businesses move to China to become more competitive. More goods are bought from China. But when US businesses do cross the water, they’re not given a fair go. China’s government limits foreign ownership in the country. They’ve used this situation to force knowledge and technology transfers many times. To find out more about what’s happening between the US and China, go here.

On Wednesday, Harje discussed how tech investors buy companies like, Inc. [NASDAQ:AMZN] and Netflix Inc. [NASDAQ:NFLX], which trade at ridiculous multiples. They hype industry growth, addressable markets and use them to justify high valuations. But ask anyone buying Netflix right now if buying a dollar of earnings for $100 is smart. Harje thinks the majority would say no. And yet they still go out and buy Netflix. It’s because most investors are blinded by their short-term visions. Investors now shuffle back into the most crowded trade long tech stocks. Harje suggests you could do something different. Rather than following the masses into the big names, you could look for more obscure companies. The cheaper ones. And if you do find something that looks like a gem, you could hold it and see where it takes you. Who knows, in a few years’ time, this potential gem could really pay off. To find out more about Harje’s views on this, click here.

In Thursday’s Money Morning, Harje puts it bluntly: investors are scared. They’re scared about economic growth. Scared about corporate earnings. Scared of what the immediate future will look like. If the Fed reaches their neutral rate soon (the rate that neither adds nor detracts from economic growth) any changes could see interest rates slip right back down. What can you do to get an edge on the market? What can you do to beat all these market timers and short-term traders? Harje explains that looking at small-cap stocks is one avenue to go down. To find out more, go here.

In Friday’s Money Morning, Harje explains that unlike US President Donald Trump, French President Emmanuel Macron isn’t blaming central bankers for the ills of his economy. No, stocks are the last thing on Macron’s mind. He’s too busy thinking about the people in yellow vests. And how to get them off the streets. A couple of people thought it would be a good idea to have the Paris Agreement…it’s a vague sort of agreement that’s trying to tackle climate change. The reason Harje says it’s vague is because there’s no quota or restrictions on CO2 emissions to follow. Yet the carbon tax, thought to save future generations, is killing people today. To find out more, go here.

Kind regards,

Alana Sumic,
Editor, Money Weekend

Alana Sumic is part of the editorial team here at Money Morning. She contributes to bringing you Money Morning each day, along with all of Fat Tail Investment Research’s many other publications.

As the Editor of the weekend edition of Money Morning Alana brings you a summary of the news for the week, and her own take on the week’s most important story in markets. She is also a writer and editor for Fat Tail Investment Research’s political publication, The Australian Tribune.

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