The broad US indices remain about 3% to 4% below all time highs and the market is awaiting for any announcement on a trade deal between the US and China. China has taken a firmer stance in the past couple days on topics relating to intellectual property theft and modifying laws to crack down on unfair trade practices. A sticking point with the Trump administration has been IP theft and the Chinese government requiring any new entrants to their markets submit trade secrets to Chinese subsidiaries. Once a US tech firm shares closely guarded secrets with a Chinese firm, the secret is almost always replicated and used by a different Chinese start up company. China doesn’t posses the same innovation as the US tech sector and the fastest way to catch up is reverse engineering and stealing intellectual property.
China states they remain open to a interim trade deal with the US, but it wouldn’t be something Trump could count his reelection chances on. The US economy is slowing slightly and with an impeachment query brewing on capital hill, one must wonder if the Chinese have gained negotiating leverage. After all, Trump is up for reelection next year and China’s premier Xi doesn’t have a term limit. China could wait out Trump and see if he gets reelected… Even if he serves another term, they would benefit from no further escalation of tariffs. It’s a delicate game of who can withstand the most economic pain.
Most economists believe a recession will strike sometime in 2020 or 2021. The inverted yield curve has been a solid predictor and demand for positive yields have pushed the US curve further into negative territory. The hunt for yield can be explained by negative rates across the globe, which passed $15 trillion recently. The entire German yield curve is negative, and their 30 year Bund costs investors -.10%. If you were running an institutional bond investment fund, you need positive yield to meet your return requirements, or make market value on a further drop in rates. All in all, there are some troubling signs from the bond market and capital flows continue to pile into fixed income, as investors are cautious around investing in equities heading into recession.