 The Market Sum | Insight after the bell
By Caleb Silver, Editor in Chief Tuesday's Headlines 1. U.S. Markets Regain a Chunk of Monday's Losses 2. Putting Volatility into Perspective 3. China's Renminbi is Reeling Markets Closed
 Markets Rebound after Monday's Rout We've seen relief rallies like today's in the past, as investors swoop in to buy oversold stocks the day after a massive sell-off. When investor sentiment is strong, they usually kick off several days of higher stock prices. It's hard to know if this one will do that, but the fact that U.S. markets only regained one third of Monday's losses on a day with very little real news on the trade negotiations is not a great sign. The trade war is the number one issue impacting global markets right now, and given the conflicting signals coming from both Beijing and Washington D.C., it's difficult for investors to have confidence in a resolution anytime soon.
We are not seeing broad capitulation by investors, yet. Today's rally, however, did lose steam in the final hour of trading in the U.S., which is not something we see when sentiment is strong.
Here's today's daily chart of the S&P 500 courtesy of tradingview.com  The Fed vs. The People's Bank of China President Trump continued to implore the Federal Reserve to cut interest rates this morning, via Twitter. This time, he cited the Chinese government's plans to cut China's rates and implied that a rate cut by the U.S. Fed would put an end to the trade war right away.  The argument he is making is that by lowering interest rates, the Fed will inject more fuel into the U.S. economy by lowering borrowing costs, which will boost spending and hiring by U.S. companies. It will also boost the stock market, as we have seen so far in 2019. By boosting the economy through lowering rates, the U.S. will be in a much stronger bargaining position relative to China since global investors will favor the U.S. and its stock market over China's.
It doesn't solve the trade issue, by any means. It just deflects the problem while potentially weakening China, and forces its leaders to make concessions in the trade negotiations.
P.S. China's Renminbi had a huge drop over the last couple days - James has more, below.
The problem is that the Federal Reserve in the U.S. is independent from the Executive branch of the government even though the President nominates the Fed Chair and the Fed Governors. In China, the connection between its Central Bank, The People's Bank of China, and its executive branch, is much tighter.
China's benchmark interest rate is 4.35%. It was last lowered by the People's Bank in October of 2015, but hasn't been adjusted since. The Chinese government has loosened lending restrictions for Chinese banks and taken other measures to stimulate the economy, but interest rates remain an arrow in its quiver.
Here's China's interest rates vs. the U.S. Fed funds rate, courtesy of tradingeconomics.com.  Are U.S. Investors Counting on a Rate Cut? The Federal Reserve will meet next on interest rates in June. According to the CME's Fed Watch Tool, more than 80% of traders expect the Fed to keep interest rates in the 2.25-2.50% range where they are now. The Fed has given no reason for them to think otherwise, and has all but explicitly said not to expect any changes this year.
However, if you go all the way out on the 2019 calendar to the December Fed meeting, more than 70% of traders are expecting the Fed to cut at least 0.25%, if not more. This doesn't mean it will happen... it just means that traders are betting it might. It may be wishful thinking.  Volatility in Perspective We've been writing about the return of volatility over the past week and a half as the VIX, the Volatility Index has spiked to levels we haven't seen since January. Volatility also manifests in wide trading swings across a stock or index, like we have seen in the past 7 trading sessions. But, prior to that, the stock market, as measured by the S&P500, was extremely tame.
According to John Lynch at LPL Research, on average, the S&P 500 has pulled back 5% or more three to four times each year, and we are still working on our first one for 2019.
Since 1970, the S&P 500 has made it through the first five months of the year without at least a 3% pullback only twice— 1995 and 2017. On average the peak-to-trough pullback has been 8.5% during the first five months of the year. We've just witnessed a 4-5% pullback from all-time highs... our first pullback of the year and we are mid-way through May. This is not to say that we won't have more volatility and another pullback - but let's keep things in perspective, especially with the S&P500 up 14% year-to-date.
Image courtesy LPL Financial 
Charts courtesy of www.koyfin.com  Video game maker Electronic Arts was looking low on batteries at the end of 2018. Since then, it released Apex Legends, an immensely popular game that has 50 million active players. The stock is up 19% this year, with 4% of that coming today.  Retailers like Ralph Lauren have been hit hard in the trade war, since many of them source their materials or manufacturing from China. But Ralph Lauren's problems are homegrown, as the company reported a decline in North American sales when it reported its fourth quarter results this morning.  The relief rally was contagious and global. Word of the Day Markets recovered slightly today in what might be referred to as a relief rally. If you wanna get some insight into what that is, or more importantly, what might follow, you may want to take a look at the term:
 photo courtesy Amazon.com
Today in History May 14, 1997, Amazon.com, Inc. goes public on the NASDAQ, offering 3 million shares at an initial price of $18 per share. The stock's value has increased at least 10,000% over the last 22 years. Amazon stock ended the trading day at $1,840.
Take a look here to see what would've happened if you invested in Amazon's IPO. Chart of the Day: Chinese Currency Plunges to 2019 Low on Trade Pressures  While equity markets bounced Tuesday on a minor recovery after the previous day's rout, China's embattled currency – the yuan, or RMB – remained pressured amid a still-escalating U.S.-China trade war. President Trump's rather sudden tweets threatening tariffs on Chinese goods, the actual implementation of those tariffs, and China's swift announcement of retaliatory tariffs on American products, have all helped weigh heavily on the Chinese yuan.
The chart above shows the USD/CNH currency pair, or the U.S. dollar against the Chinese (offshore) yuan. Any rise in the currency pair, like what we've seen in the past two weeks, represents either the dollar strengthening against the yuan and/or the yuan weakening against the dollar. In this case, it was very clearly the yuan plunging against the dollar, especially since the U.S. dollar has actually been falling against other major currencies during the same time period. On Tuesday, the Chinese yuan hit a new year-to-date low against the dollar before bouncing slightly. Now, the Chinese currency is not far off its long-term low that was hit in early November of last year.
As we touched on yesterday, trade-spooked Chinese investors dumping the yuan and possibly buying up cryptocurrencies may have been one of the factors boosting the price of Bitcoin this month. As for what may happen next for China's currency, the yuan could potentially extend its fall down towards the 7.0000 level against the U.S. dollar if trade tensions remain elevated in the near term. Longer term, however, the likelihood of an eventual trade war resolution is high, due to the sheer magnitude of what's at stake for both countries. With any such resolution, the oversold yuan is highly likely to bounce back from its current depths.
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Tuesday, May 14, 2019
Relief Rally
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