After the Fed announcement in July, it looked like August had the potential to be a quiet summer month, then the RMB broke the 7 barrier and the trade war took on a new negative dimension. We have switched to currency wars after the US Treasury declared China a currency manipulator. Oddly, their actions before August have been to stabilize the currency and control volatility as opposed to letting it fall to offset tariffs. The currency moves seem consistent with the underlying China economics.
With the currency breaking through the seven level, viewed as a key policy barrier, markets reacted violently. Investors who knew nothing about China's currency now watch every daily movement for signs of trade war escalation. A lower currency can offset some of the cost of the tariff for importers, but it has further ramification with capital flows and dollar liabilities for Chinese companies. The uncertainty of what may happen next to currency markets certainly impacted all risky assets. The flight to safety in long bonds was spectacular with TLT jumping higher by more than 10 percent. This bond move reinforced the global push to lower rates.
The Jackson Hole monetary conference only reinforced the unsettling verbal war between central bankers and politicians. This is not a US problem but a global issue. Politicians want central banks to further manipulate rates to jump start growth without the pain of adverse fiscal choices.
With continued dynamic trade war rhetoric, it is hard to make any judgments on the direction of risky assets. A September Fed meeting only makes for a more chaotic monetary environment of either action or no action based on politics and not data. With long bonds now generating over 20 percent year to date returns, the safe asset does not look so safe going forward. Perhaps US T-bill rates look like the best alternative.
