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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1. Moving the markets

It comes as no surprise that, after yesterday’s strong run-up, the major indexes took a bit of a breather, however, they still managed to close in the green, despite dipping below the unchanged line several times during the session.

So far, it looks that this month may turn out to be the second-best August since 2009, a very interesting occurrence, especially when considering the ever widening gap between the S&P 500 and the collapse of US economic data, which is hardly awe inspiring (hat tip to ZH for these charts).

So, the markets appear to be driven by other factors, and not sound fundamentals. Today, a small assist came from a measure of consumer confidence that hit a nearly 18-year high and was an exception to the slumping data points of the recent past.

The foreign currency debacle continued today led by the Turkish lira plunging -2.35%. This escalated predominantly in the Latin American countries as this chart shows. However, the shakeup was not big enough to make the headlines nor did it affect domestic equities.

Nevertheless, after a slow start, stocks came alive during the second half of August and put in a good performance, despite this being the dog days of summer. With only 3 trading days left, let’s see if traders’ appetites remain bullish.

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