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Trump-Xi Ping Pong battle gets serious!

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The ping pong match between the Presidents of the USA and China got serious overnight with the Fed ‘umpire’ Jay Powell having little impact on a game that’s getting out of hand!

The day kicked off with China announcing a series of tariff responses on $US75 billion worth of US goods, which includes cars. They’ll come in batches, some starting September 1 and others December 15, which looks like retaliation return of serves for the tariffs that Donald Trump announced, which affect $US300 billion worth of Chinese goods.

These too will have similarly staggered starting points. This Chinese action was step one in the escalation of the trade war overnight, made worse by a series of Trump tweets, which the stock market didn’t like. At the close, the Dow was down 623 points (or 2.37%) to 25,628.9. We need to get ready for a bad day for stocks locally on Monday.

This rough CNBC shot (off my TV at 5am) shows it all:

China’s retaliation, followed by little positivity from the Fed boss Powell and then the Trump tweets! Let me show you some of these:

“Our Country has lost, stupidly, Trillions of Dollars with China over many years. They have stolen our Intellectual Property at a rate of Hundreds of Billions of Dollars a year, & they want to continue. I won’t let that happen! We don’t need China and, frankly, would be far…

But wait there’s more…

“…better off without them. The vast amounts of money made and stolen by China from the United States, year after year, for decades, will and must STOP. Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing…”

If you weren’t sure what a trade war escalation looks like, well now you are. I suspect it will get worse before it gets better.

And it did get worse, with the Powell speech not strongly saying that a rate cut would be used to offset the trade threats to the economy. The market needed more than this from Powell: “Our challenge now is to do what monetary policy can do to sustain the expansion so that the benefits of the strong jobs market extend to more of those still left behind, and so that inflation is centred firmly around 2 percent.”

This speech from Jackson Hole, Wyoming, didn’t cut it, with China and the US trading trade blows from Beijing to Washington having a bigger market effect!

Not surprisingly, the yield curve inverted and the efforts of Donald, Xi and Jerome did a lot to make that happen. Well done, team!

Rate cuts are coming and we’re bound to see them in September in the US. And if this trade stoush goes from bad to worse, which looks likely, our RBA could cut before Cup Day.

These tweets from Trump about Powell show that we’re in for some tough times on the market next week:

“As usual, the Fed did NOTHING! It is incredible that they can “speak” without knowing or asking what I am doing, which will be announced shortly. We have a very strong dollar and a very weak Fed. I will work “brilliantly” with both, and the U.S. will do great…”

And then he threw this killer in:

“My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?”

Companies such as Ford, GM, John Deere, Caterpillar, 3M, Goldman Sachs and IBM were all clobbered and took the Dow down big time.

On the local front, we didn’t need this ping pong play, with shares up 117.6 points (or 1.8%), with the S&P/ASX 200 finishing at 6523.1 for the week. And it has been so good to see that earnings season hasn’t been a disappointment as some experts were predicting.

I’m not saying it has been great but it hasn’t been a shocker.

This is AMP’s Shane Oliver’s take on earnings season so far:

Good news came from Lend Lease, up 23%, as it called an end to the residential downturn crisis. Goodman Group was up 6.2% after a solid report and McMillan Shakespeare was the huge winner, up 30.6% for the week! Wisetech rose 24.5%, Smartgroup 20.14% while Altium put on 12.7%.

Losers included A2 Milk, down 8.3%, despite a good profit surge, South 32 gave up 10.9% but other miners did a lot worse. Pilbara Minerals lost 16.3%, St Barbara shed 15.16%, while Saracen was down 11.25%.

Good news for those of you who’ve been going for gold for a long time or those who took my ETF tip a few weeks back, with RBC Capital tipping more gold price spikes. The spot price is around $US1,506 but RBC can’t support those who think it will go to $US2,000. That said, there’s still a lot of room to go higher!

What I liked

What I didn’t like

Growth expected

The RBA minutes, released this week, said: “The forecast for GDP growth over 2019 had been lowered to 2½ per cent. Growth was expected to pick up to 2¾ per cent over 2020 and to around 3 per cent over 2021. This was supported by a range of factors, including lower interest rates, tax measures, signs of an earlier-than-expected stabilisation in some established housing markets, the lower exchange rate, the infrastructure pipeline and a pick-up in activity in the mining sector.”

And this table from Morgan’s Michael Knox says our economy is set to grow faster than the US, the EU and Japan, and I bet we beat the UK!

Gotta hope this trade war ping pong match doesn’t make these numbers wrong.

My new book ‘Join the Rich Club’ is now available for purchase through the Switzer Store website [1].

The week in review:

Top Stocks – how they fared:

The Week Ahead:

Australia
Sunday August 25 – Speech by Reserve Bank Governor
Tuesday August 27 – Speech by Reserve Bank official
Tuesday August 27 – CBA Household Spending Intentions (July)
Wednesday August 28 – Construction work done (June quarter)
Thursday August 29 – Business investment (June quarter)
Friday August 30 – Building approvals (July)
Friday August 30 – Private sector credit (July)
Friday August 30 – APRA bank statistics (July)

Overseas
Monday August 26 – US Durable goods orders (July)
Tuesday August 27 – China Industrial profits (July, annual)
Tuesday August 27 – US House Price Indexes (June)
Tuesday August 27 – US Consumer Confidence (August)
Tuesday August 27 – US Richmond Fed manufacturing (August)
Thursday August 29 – US Economic growth (June quarter)
Thursday August 29 – US Goods trade balance (July)
Thursday August 29 – US Pending home sales (July)
Friday August 30 – US Personal income/spending (July)
Saturday August 31 – China purchasing manager indexes (August)

Food for thought: 

“This company looks cheap, that company looks cheap, but the overall economy could completely screw it up. The key is to wait. Sometimes the hardest thing to do is to do nothing.” – David Tepper

Stocks shorted:

ASIC releases data daily on the major short positions in the market. These are the stocks with the highest proportion of their ordinary shares that have been sold short, which could suggest investors are expecting the price to come down. The table shows how this has changed compared to the week before.

Chart of the week:

AMP Capital’s chief economist Shane Oliver this week highlighted that the gap between the grossed-up dividend yield on Australian shares (5.7%) and the Australian 10-year bond yield (0.94%) has reached a record high of 4.8%:

Source: Global Financial Data, Bloomberg, AMP Capital

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