China fires its biggest warning shot yet in the trade war, it is now escalating to a currency war. News Forecasters, give a short term view on where stocks, bonds, and the dollar heads, in light of recent significant moves. China has added its currency to the weapons it is willing to use in the trade war with the U.S., and it is now up to President Donald Trump to determine how much further the situation can escalate. China on Monday allowed its currency to slide below what has been a psychological red line—the key 7 yuan to the dollar level — for the first time since 2008. China also halted new purchases of U.S. agricultural products. Dow futures down over 3%, near the lows of the day.
News Forecasters’ Market Watch:
Stocks DOW – the DOW closed on the futures at the low of the day. This generally means when you close at a low or high of the day it’s got further to go. But stocks are still in a general uptrend on a long-term basis. It has pulled back to the recent upward trend line, perhaps even breached it a bit. We don’t like that the DOW closed on a low of the day. Technically it should get a bounce off this trend line, for at least a 50% retrace back to the recent highs. From here we would have to retest the lows and see if it goes back to the highs – and continue with the overall long-term trend of stocks. If this recent sell-off is something more serious and we continue heading lower beyond the trend line, get your helmets on.
Bonds 30Y – bonds have been trading in a large range for quite a few years now, as far back as 2015. We are back at the upper range. Price is inverse the yield, so high prices mean low yields. Remember bonds are at least 10 times the size of market capitalization as stocks. These extremely low yields are telling us that the economy will become weak. Market prices tend to be ahead of the economy by 6 to 18 months. We expect bond prices to consolidate at the current levels. If we break out to even higher prices or lower yields, this would signal recession ahead.
Dollar – as stated above the U.S. has moved from trade war to currency war with the Chinese. Though the Dollar was up strong against the Chinese Renminbi, against other major foreign currencies, it fell sharply due to concerns of U.S. GDP growth concerns. Remember, the value of a currency is broadly = GDP / is the monetary base. European base currencies are struggling too with GDP growth – even worse than the U.S. Pacific Rim currencies will struggle with China concerns. Overall the Dollar continues its slow march higher. We may see the Dollar challenge the Euro lows of a few years ago, down to near $1 to €1.
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