Weekly Issue: Continued Volatility Puts Us in a Holding Pattern

Weekly Issue: Continued Volatility Puts Us in a Holding Pattern

Volatility returned to the market this week, but unlike the last several it wasn’t driven primarily by trade war and concerns over escalating tariff. This time it began with concerns over Turkey, its flip-flopping currency and contagion concerns with other emerging markets and spread with tumbling oil and metal prices reigniting concerns over a global slowdown due in part to China’s slowing economy.

One of the more closely watched metals as a leading indicator of the economy is copper — or as it’s known in the financial markets as Dr. Copper— because it is utilized in a number of different sectors, from home construction and consumer products to manufacturing. Yesterday, copper prices hit their lowest levels in 13 months, entering a bear market, potentially signaling an economic slowdown is happening around the world.

 

 

The culprit of that downward price move? This week, China reported weaker-than-expected industrial production and retail sales growth, raising worries that the second-largest economy in the world could be headed for a slowdown.

Against that backdrop and the escalated tariffs against China, it appears the Chinese government may have blinked last night as it was the Chinese Commerce Ministry announced a delegation will travel to the United States later this month for talks for another round of trade talks. The Chinese delegation will be led by Vice Commerce Minister Wang Shouwen, who will hold talks with David Malpass, the US Treasury Department’s undersecretary for international affairs, according to the Chinese statement.

That news led to a rebound in Asian markets earlier today, and as I write this US futures are up nicely, looking to reverse yesterdays’ losses. While there is reason to be hopeful, we also know the devil will be in the details as both the US and China will be looking to claim victory in the upcoming round of trade talks…. Assuming they are able to hammer out a new pact. Mixed with the seasonally slow trading volume, we are likely to see the volatility continue.

I remain optimistic that President Trump and his team will be able to negotiate a better trade deal with China. Odds are it won’t be perfect, but that doesn’t mean it can’t be better. At the same time, however, Trump is once again threatening to shut the US government down and has tied funding the government to a showdown on the border wall. The Senate returned to work yesterday, and the U.S. House will return Sept. 4. With the federal fiscal year ending on Sept. 30, Congress a short time frame to find a fix. We could very well be in for another game of chicken, and one that could put some additional indigestion in the mouths of investors.

As I look ahead, next Thursday (Aug. 23) brings the IHS Markit Flash August PMI data, which should inform us as to the impact of tariffs that have been enacted of late. Between now and then, we should get some additional details on the upcoming round of US-China trade talks. For now, the risk is the market overreacts to the news US-China talks will resume. As I said above, I’m hopeful but as someone that looks below the headlines, I’m holding off doing anything with the Tematica Options+ Select List until we have more details on what those conversations may bring as well the true speed of global economy.

 

Housekeeping

As I shared earlier this week, Dycom Industries (DY) took a hatchet to its top and bottom line forecast for the back half of 2018, which sent the shares tumbling. We took advantage of that, adding to the DY shares position on the Tematica Investing Select List. That same plunge, however, stopped out our Dycom (DY) December 2018 110.00 calls (DY181221C00110000) at 3.00, generating a return of -25.0%.

About the Author

Chris Versace, Chief Investment Officer
I'm the Chief Investment Officer of Tematica Research and editor of Tematica Investing newsletter. All of that capitalizes on my near 20 years in the investment industry, nearly all of it breaking down industries and recommending stocks. In that time, I've been ranked an All Star Analyst by Zacks Investment Research and my efforts in analyzing industries, companies and equities have been recognized by both Institutional Investor and Thomson Reuters’ StarMine Monitor. In my travels, I've covered cyclicals, tech and more, which gives me a different vantage point, one that uses not only an ecosystem or food chain perspective, but one that also examines demographics, economics, psychographics and more when formulating my investment views. The question I most often get is "Are you related to…."

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