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The US is more likely to end the trade war than face a ‘Trump recession

J.P. Morgan’s head quant said Wednesday that a U.S.-China trade deal could head off a “Trump recession” and ignite a powerful rally in value and high beta stocks.

Marko Kolanovic, global head of quantitative and derivatives strategy, said in a note that he is “cautiously positive” on stocks, but his view carries risk because it depends on progress being made in the trade war.

The trade war has so far offset all benefits of fiscal stimulus and could lead to a global recession if it continues. That recession would be called the “Trump recession” because it would have been mainly caused by the trade policies of President Donald Trump’s administration, he noted.

If the trade battle were to end, Kolanovic expects there would be a swift rally in the stock market.

“This would translate into a quick ~5% rally in broad markets, and a 10-20% rally in value and high beta. As a strong market and avoiding a recession would boost re-election odds, it would only be rational to expect this outcome,” wrote the analyst.

“The impact of the trade war was particularly negative on segments that were its intended beneficiaries — such as manufacturing (autos, electrical equipment, etc.), smaller domestic companies, steel industry, etc,” he noted. For instance, U.S. Steel has fallen 75% since the start of the trade war.

But segments that might not do well include defensive and low-volatility segments, like low-beta stocks, utilities, REITs and staples. Those sectors are “very expensive and might be poised to underperform in both positive and negative trade scenarios.”

Kolanovic said market sentiment has become “fragile,” as discretionary investors reduced their stock market exposure over the past few weeks, and net exposure, or “equity beta” of hedge funds is very low.

Yet, Kolanovic said he is not negative on stocks or the economy because the trade war could be ended on short notice, and many market segments are already pricing in a worst case scenario.

In the past two years, he said the stock market could be divided into two phases—one a period where it rose in anticipation of fiscal reform that lifted corporate earnings and the economy, and the second “a value-destroying trade war.”

“Before the trade war, equities were rising at an above-trend pace, and then stayed unchanged for ~18 months. If one takes the average annual return of US equities was ~7% (current capitalization of $30T), the estimated cost of the trade war so far is about ~$3T,” he wrote. “The market damage is ~100 times the tariffs collected so it is clearly not making the country richer.”


Trump says stock market would be ’10,000 points higher’ if Fed didn’t raise rates

President Donald Trump renewed his criticism of Federal Reserve Chairman Jerome Powell in a recent interview with ABC News’ George Stephanopoulos, saying the economy and stock market both could be doing much better “if we had somebody different” in charge of the central bank.

The president predicted that GDP would be 1.5 percentage points higher had Powell and his fellow central bankers not enacted rate increases and “quantitative tightening.” In addition, he said the stock market would be 10,000 points higher, presumably a reference to the Dow Jones Industrial Average, which was at 26,106 heading into Friday trading.

“If he did nothing, or perhaps even loosened, we would be in my opinion, just an opinion, 10,000 points higher than already a very high number,” Trump said. The number implies a potential 38% increase for a bluechip average, or about double the gain it already has seen since the November 2016 election.

Trump has repeatedly criticized Powell, whom he named to the post in early 2018, and has said openly that he believes the Fed should be cutting interest rates. Previous presidents have taken on Fed chairs before, but rarely in such a public fashion.

“He’s my pick and I disagree with him entirely,” Trump said. “As you know, it’s independent. … But I’m not happy with what he’s done.”

Under Powell’s tenure, the Fed raised its benchmark overnight interest rate four times in 2018 and had intended to hike twice more in 2019 before making a policy pivot earlier this year.

In addition to the rate hikes, the Fed has reduced its balance sheet by about $600 billion by allowing proceeds to roll off from the bonds it acquired during three rounds of quantitative easing. Trump defined the process as “taking money out of the tills so that people can’t use it for doing what they’re doing.”

The Fed is currently unwinding the balance sheet runoff and will stop it entirely in September.

Trump said “it’s OK to raise interest rates a little bit” but said doing so now makes the nation’s $22 trillion debt more expensive. The debt has increased 10.3% during Trump’s 2½ years in office after soaring nearly 88% under former President Barack Obama.


Goldman skeptical of ‘insurance’ U.S. rate cuts from Fed

Goldman Sachs economists said on Sunday they are skeptical of “insurance” U.S. interest rate decreases from the Federal Reserve to forestall possible slowing in U.S. economic growth due to global trade tensions.

A surprise escalation in trade tensions between Washington and Beijing since May, together with stubbornly low inflation, have spurred bets among traders the U.S. central bank may lower key lending rates by 0.75 percentage points by year-end.

“However, we think the hurdle for such cuts is likely to be higher than widely believed,” Goldman economists wrote in a research note published on Sunday.

A number of primary dealers, or the 24 top Wall Street firms that do business directly with the Fed, anticipate the Fed would lower key borrowing costs beginning this summer.

Goldman Sachs Group Inc and a few other primary dealers have stuck with calls that the Fed would refrain from decreasing rates until there is evidence of significant deterioration in business and consumer activities.

Goldman economists said the three-quarter point in rate cuts in 1995-1996 and 1998, which some analysts point to as recent examples of pre-emptive policy easing from the Fed, were responses to data “rested at least as much on observable deterioration as on an insurance motive.”

They said another assumption for insurance rate-cuts is that Fed officials could reserve the moves once the risk abates.

“However, the greater political scrutiny of Fed hikes now—especially with a presidential election approaching—could make this harder to do in 2020, so that overly hasty insurance cuts now might increase the risk that the funds rate gets stuck at too low a level if the economy remains resilient,” they wrote.

On Friday, U.S. short-term interest rates futures implied traders see about a 58% chance the Fed would lower short-term rates by 0.75 point by year-end, up from 54% a week earlier and 7% a month ago, according to CME Group’s FedWatch too.

Fed policy-makers will meet next Tuesday and Wednesday where analysts widely expect they would pave the way for possible rate cuts later this year.

Interest rates futures suggested traders priced in a 23% probability the Fed would lower rates next week, compared with 25% a week ago and 13% a month earlier, the CME FedWatch program showed.


China to roll out new rare earths policy ‘as soon as possible’

Amid the ongoing trade war with the US, the Chinese development and reform commission is currently developing new state policies on rare earth metals, and intends to make them public as soon as possible.

The spokeswoman for the Chinese state planning agency NDRC, Meng Wei, did not provide any further details at a Monday press conference.

Beijing’s veiled threats to restrict exports of rare earth metals to the US have been called by many as one of China’s nuclear options in a trade conflict with Washington. The US relies on China for about 80 percent of its rare earths supplies. The metals are used in everything from electric car motors and electronics to oil refining. They are also vital for US national security, as they are used in many major weapons systems.

Washington has reportedly started exploring opportunities to purchase rare earth metals from African countries, but they cannot provide the volume that China can. Beijing’s reserves account for roughly 30 percent of the world’s total, and the country dominates global supply chain as it produces more than 80 percent of them.

Rare earth metals are a group of 17 chemical elements, namely gadolinium, holmium, dysprosium, europium, ytterbium, lutetium, neodymium, praseodymium, promethium, samarium, terbium, thulium, cerium, erbium, scandium, yttrium and lanthanum. Technically they are not rare but very difficult to find in large concentrations, and hard to process as the ores often contain naturally occurring radioactive materials.


Health Canada finalizes regulations for the production and sale of edible cannabis, cannabis extracts and cannabis topicals

Protecting the health and safety of Canadians is a top priority for the Government of Canada. That is why the Government implemented a strict legal framework to regulate and restrict access to cannabis keeping it out of the hands of youth, and profits out of the pockets of criminals and organized crime.

Today, the Government of Canada announced amendments to the Cannabis Regulations setting out the rules governing the legal production and sale of edible cannabis, cannabis extracts and cannabis topicals. In keeping with the federal government’s public health approach to the legalization and strict regulation of cannabis, the amended regulations seek to reduce the health risks of these cannabis products. At the same time, the amendments provide for a broad diversity of cannabis products, which will help displace the illegal market. These products pose unique health risks, which is why we have taken the necessary time to establish appropriate safeguards.

As required by the Cannabis Act, the amended regulations will come into force on October 17, 2019. However, it will take time, after that date, before new cannabis products become available for purchase.

It is expected that a limited selection of products will appear gradually in physical or online stores, and no earlier than mid-December 2019. Federal licence holders will need to provide 60-days notice to Health Canada of their intent to sell new products, as they are currently required to do. Additionally, as with any new regulatory framework, federally licensed processors will need time to become familiar with and prepare to comply with the new rules and to produce new products. Provincially or territorially authorized distributors and retailers will also need time to purchase and obtain the new products and make them available for sale.

Public education and awareness efforts are critical to informing adult consumers about the unique health and safety risks posed by these cannabis products. Health Canada has made available today new evidence-based resources and updated content on its website to support consumers in making informed decisions about cannabis.

The Government will also continue to work closely with the provinces and territories, Indigenous communities, the regulated industry, public health organizations, and law enforcement to support the effective implementation of the amended Cannabis Regulations.