This Market Is a Mess. And It Isn’t Just Stocks That Are the Problem
Is a loss of confidence in the dollar and bonds what's really causing the stress in the financial markets?
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Chaos continued on Thursday as a good chunk of Wednesday’s giant gains were reversed. There wasn’t any surprising news that triggered the reversal. It was mainly just lingering questions about how much damage the trade war with China would do and how long it would take to cut trade deals with the rest of the world.
Typically, when there is this much uncertainty, investors put money into bonds and the dollar, but both of those asset classes were notably weak on Thursday. Even a lower-than-expected CPI and increased expectations of a Fed interest-rate cut didn’t help to drive down interest rates.
The bond market has been acting strangely for the past week as interest rates have moved sharply higher while stocks have dropped. That is the reverse of what normally happens.
There are several theories about why there is this stress in the financial system. Some believe It has to do with moves made by hedge funds and Japan, but the most likely cause is that tariff turmoil is causing a loss of confidence in the dollar and bonds. The dollar is the currency that is most used in trade, and that cash is generally parked in Treasury bonds until needed. China is likely liquidating some of its Treasury debt, and other countries are looking for alternatives.
Pressure on bonds and the dollar are generally of greater concern than poor action in equities. Some experts believe that it was primarily the weak bond action that drove President Trump to pause the tariff hikes. The continued weakness in bonds on Thursday is not a good sign, and several Fed members have indicated that they are watching closely.
Market participants are concerned about how long it is going to take for trade deals to be made, and there aren’t any signs of progress with China yet. If there isn’t movement soon, then the risk of inflation starts to increase, and the potential for economic slowing increases as well.
It is a mess out there, and it isn’t just stocks that are the problem.
Have a good evening. I’ll see you Friday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
