foxex: Start to Finish

The Market Sum | INVESTOPEDIA

Insight after the bell

By Caleb Silver, Editor in Chief

Wednesday's Headlines

1. Stocks Rally, Start to Finish

2. Chart of the Day: Chinese yuan rebounds against dollar as trade tensions cool

Markets Close

Dow
24,527.27 +0.64%

S&P
2,651.07 +0.54%

Nasdaq
7,098.31 +0.95%

VIX
21.46 -1.38%

INV Anxiety Index
100.05 Neutral

US 10-Yr Yield
2.906 +0.94%

A Clean Rally:

How about that? Stocks started strong, stayed strong and ended stronger (than they have been). We haven't seen a clean rally like today's in quite some time. Sure, the DJIA faded as the afternoon wore on, but we didn't see the 3PM selloff that has characterized the few recent rallies of the past two months. We are not going to try to explain why today is different than all other days, because we can't.

We do know that there appears to be progress in the trade talks between the U.S. and China. Both sides are talking in friendlier terms, which is good news for just about every major industry that relies on a global supply chain. Most do. This doesn't mean that the acrimony won't return tomorrow or next week, either. Anything can happen, but the general tone has been more positive since yesterday, and that may have soothed markets.

Why it Matters:

The trade war has obviously been kryptonite for markets around the world. At least 5 major countries are in the grips of a bear market and many more are playing too close to the den. In the U.S., industries that don't have that much exposure to the trade war like consumer staples were being hammered along with the rest of the market since the beginning of the fourth quarter. There are other reasons for that, as we have seen in technology and financial stocks, but the foul winds of an all out trade war were making everything smell bad. Not today.

We are also seeing signs of hope in the currency market. The Yuan, which has been under pressure since the first salvos of the trade war were fired, is recovering against the dollar. (James breaks it down in our chart of the day, below.) In many ways, the currency or forex market may be a more reliable market to indicate investor sentiment. It trades 24 hours a day with trillions of dollars worth of currencies moving in and out of global banks to hedge other positions, secure capital, or seek opportunity. We'll keep an eye on it and keep you posted.

What's Next:

We are not out of the woods, by any measure. We are barely a week into the 90 day negotiation period between Beijing and Washington, and a lot can happen. Meanwhile, the other pressures on U.S. markets have not exactly abated. The Fed will meet next week and is still likely to raise the federal funds rate by a quarter percent, according to most estimates. The probability has come down to 75 percent from 80 percent, according to FedWatch, but it's more than likely. Rates are still very low by historical standards, but the rate creep has impacted the housing market, auto loans and bank lending. Banks have taken it hard and it's hard to see what will turn that sector around.

Take a look at the Bank ETF, XLF against the S&P 500 ETF SPY over the past month. Banks have been underperforming the broader market all year, but the selloff has been more pronounced as of late. Financials are often the pace cars for market rallies, but they are clearly lagging right now with no sign of speeding up. A smooth resolution of the tariff issue would certainly help, but it might not fix everything.

Other Headlines:

Theresa May survives key vote in UK Parliament (BBC)

Brexit hopes are vaguely alive, and Theresa May has maintained enough confidence to remain the Prime Minister. Bully!

8 Stocks to Stomach Volatility

Try the Sharpe Ratio - better than Pepto Bismol.

Stock Valuations hit lowest level in 5 years

Some say they are still too high.

Why was Under Armour the worst stock of the day? (CNBC)

Don't blame Steph Curry...but the forecast is weak. (Betting against the moon landing never helps.)

Palantir Knows Everything About You (Bloomberg)

If you read this piece in the NYT about big tech and your location data and it freaked you out, keep reading. A piece from earlier this year, but excellent reporting on a company worth knowing about. This industry is crazy spooky.

Chart of the Day: Chinese yuan rebounds against dollar as trade tensions cool

Since April, the Chinese yuan (or renminbi) has dropped sharply against the U.S. dollar. Much of the yuan's weakness against the greenback has been due to the sheer strength of the dollar in recent months. At the same time, China has been accused by many, most notably President Trump, of actively "manipulating" and devaluing its own currency in the interest of supporting its export-driven economy. A cheaper yuan makes China's exports more appealing to foreign buyers. Another key factor recently driving the yuan lower against the dollar has been the escalating threat this year that trade tensions between the U.S. and China could grow into a full-blown trade war.

As shown on the chart above, trade war developments generally have a direct impact on the USD/CNY (US dollar vs Chinese yuan) currency pair. For example, when Trump and Chinese President Xi announced a 90-day trade war 'ceasefire' in early December, USD/CNY made the biggest two-day decline since 2005. This simply meant that the yuan appreciated substantially against the dollar on the news that tensions had begun to cool.

More recently, Trump has been taking on a more conciliatory tone with China, saying that he would consider intervening in efforts to extradite the CFO of Huawei, in the interest of facilitating a trade deal with China. This helped boost the yuan, pressuring USD/CNY down once again.

At least on the immediate horizon, USD/CNY will continue to be impacted by how US-China trade negotiations play out. With Trump seemingly eager to get a deal done, there is increasing potential that the yuan will continue its rebound against the dollar and USD/CNY will continue to retreat.

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