1. Moving the markets

Despite several attempts, the major indexes could not gather enough bullish momentum to break above the unchanged line and stay there. Instead, it was a see-saw session that saw the indexes ending up with minor losses.

Trade tensions with Canada contributed to the uncertainties in the market as Trump threatened to “leave Canada out of any new NAFTA pact.” The talks were halted with no tangible agreement, but at least the parties agreed to meet again. Regarding China, the tariffs of an additional $200 billion will begin on Thursday.

We may see some more sideways action until Friday when the employment report will be released. As one portfolio manager opined: “It should set the tone for the remainder of the month, from the Fed meeting to views on inflationary pressures and overall growth. The betting is more of the same, good numbers, good equity markets, and still growing economy.”

Just because most MSM does not report it does not mean the Emerging Market crisis has been resolved. Far from it. While Turkey has been relatively quiet, today it was the South African Rand and the Argentine Peso, both of which were in freefall this morning causing their bond yields to jump and their stock markets to drop. This is a developing story, and I firmly believe that this contagion will go global.

Right now, however, the contagion is just starting and has not yet affected the western industrialized nations keeping us invested in the markets, until there is a clear change in long-term direction.

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1. Moving the markets

All good things must end eventually. That was the case today, as the 4-day win streak was snapped with the major indexes slipping modestly ahead of the Labor Day weekend. Sure, after scoring repeated record highs, a pause was in order, but at mid-day other factors contributed to the sudden downside acceleration.

Abruptly, tariff troubles were on everybody’s mind when news headlines announced, what everyone already knew, that $200 billion of China tariffs were set to be implemented next week after the expiration of the ‘comment’ period. That was enough to finally give the bears some ammunition and south we went, as the VIX and S&P 500 continued their decoupling.

Not reported much by MSM was the bloodbath in the Emerging Markets’ currencies (EM), which accelerated throughout the day. The problems seem to be deepening with the Indian Rupee, Brazilian Real, and the Turkish Lira getting spanked hard. Topping off the charts as the biggest loser of the day was the Argentinian Peso, which crashed, despite a rate hike, but bounced into the close.

These are critical development and, while in their early stages, will spread and likely affect the European banking system and then move eventually across the Atlantic. For right now, they appear to be localized events until, one day, investors realize that we are all financially connected and affected, and that there is no true isolation.

While I don’t expect much enthusiasm tomorrow, it being the last trading day of August when volume will likely slow to a crawl, the EM currencies may continue their radical moves. I for one think that these are important developments, maybe representing the infamous canary in the coalmine, and will stay on top of their changes and the havoc they may be creating.

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1. Moving the markets

And the beat goes on. At least for the moment, the major indexes act like a run-away train with nothing being able to stop it. The S&P 500 and Nasdaq are continuing to rip higher and scored a 4^th straight record close while the Dow finished at its highest point since February.

Helping equities levitate to ever higher levels was a revised 2^nd Qtr. GDP number, with a second estimate of 4.23% (annualized) vs. the original 4.0%. That makes it the highest since the summer of 2016. Then there was renewed optimism that a new trade deal with Canada may be forthcoming, possibly in a similar fashion like the one just announced with Mexico.

On the downside, we saw that pending home sales slumped for the 7^th straight month by -0.7% missing expectations (+0.3%) by a wide margin and confirming that housing has hit the broadest slowdown in years. Remember that recent reports showed similarly dismal results for Existing- and New-home sales as well as mortgage applications.

With all that euphoria going on, it’s worthy to note that the decoupling continues. There is the Chinese Yuan which, after staging a nice rally, has recently shown weakness again. Bond yields have come off their highs and are showing this picture when charted against the S&P 500. And last, but not least, the Emerging Market currencies are collapsing again, as shown here in today’s chart.

When this type of decoupling occurs, it’s just a matter of time that these discrepancies will correct to fair value. The open-ended question is: In which direction will the correction occur? We will have to wait and see, but let’s enjoy the present moment of being on the ‘right’ side of the market.

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