If you weren’t getting nervous calls from clients earlier this week, you probably got some this morning.
At least that’s the vibe we are getting from our subscribers as the emails increased this morning thanking us for:
- The clear China commentary and
- The hedge ETF (Even if they didn’t use it, clients always appreciate knowing their advisor has a plan).
In what is becoming a mini-August redo, Chinese authorities continue to make things worse seemingly each night, as they continue to devalue the yuan and undermine confidence in their control of the Chinese economy.
Last night, it was a .5% devaluation in the yuan that spooked markets and led to the closure (after just 29 minutes) of Chinese markets.
I cringe to think what they’ll do tonight.
As we told subscribers this morning – the outlook near term for this market remains the same.
Until the yuan stabilizes, US stocks will be under pressure.
So, we spent much of yesterday researching leading indicators for the yuan, and in today’s report we singled out a specific indicator we believe will tell us first when the yuan will stabilize (we explain it more below).
Our paid subscribers know we will be watching this for them (early) each morning going forward, because if the yuan does stabilize, we want them to know first so they can alert clients and make tactical allocations.
But, lost in all this China noise is the fact that there is an important jobs report tomorrow, and it has the potential to make markets more volatile if it comes in “Too Hot” because it’ll cause a spike in the dollar, which will further pressure oil and stocks.
So, unfortunately it’s not going to get any easier between now and the weekend.
Our job, through periods of turmoil such as this, is to stay focused on the fundamentals for our clients, because it’s too easy to get caught up in the wild swings between despondent negativity (like right now) and euphoric bullishness (like late December).
That’s why in today’s Report, like we always do the Thursday before the jobs report, we provided an in-depth “Jobs Report Preview,” because:
Understanding what’s happening with the economy and the outlook for the Fed is more important for client portfolios over the medium term than trying to guess when the Chinese will stop devaluing their currency.
As a financial advisor, during volatile times like these, you have to be able to articulate the risks in the markets, and explain how you will successfully navigate those risks.
We have been totally dedicated to making sure our subscribers know what’s really driving markets because we firmly believe volatility like this is an opportunity to strengthen your relationships with current clients and impress prospects who are currently with other firms, especially this early in the year when clients are more open to making changes.
We all know that successful advisors grow their books by connecting with high net worth clients, and to build trust with those clients you can’t just repeat company “perma-bull” strategies.
That is why we created The Sevens Report, so that advisors can make sure they have an independent analyst that communicates with them daily at 7 AM and quickly identifies the risks and opportunities for:
- Commodities, and
- Interprets what economic data means for the market.
AdvisorCheatSheet is a weekly report our paying subscribers use to keep up on markets, seize opportunities, avoid risks and get more assets.
With a monthly subscription cost that is less than a single client lunch, we firmly believe we offer the best value in the independent research space.
This has been as difficult a start to the year as we’ve seen in a long time (since ’09) and as a courtesy we’ve included an excerpt of our updated analysis on China as well as our “Jobs Report Preview.” We hope both make your day a little easier.
China Update – Watching the “Offshore” Yuan
The yuan declined another .5% over night and Chinese stocks went into free fall, and that’s spilled over again into Western markets.
Fundamentally, nothing has changed since early this week: Stocks won’t stop falling until the yuan stabilizes, and the longer Chinese authorities allow the yuan to decline, the worse the selling will get.
So, unfortunately it’s a bit of an August re-do:
- Macro fundamentals in China aren’t this bad (just like in August) but
- The moves by the Chinese authorities are destroying confidence and that’s metastasizing into a panic (again).
The market drops are starting to detach from fundamental reality, but in the age of algos and “Risk Parity” funds, markets can get violently irrational far quicker and longer than we can stay solvent.
Markets bounced this morning on news that Chinese regulators have suspended the “Circuit Breaker” system, but that’s not going to fix the underlying issue – which is the yuan!
Again we reiterated our “Pure Play” Hedge ETF to our subscribers this morning, because it will continue to protect portfolios from further China inspired declines. It’s not an inverse China ETF, it’s much more liquid and mainstream, but it has the right exposure and volatility to actually make a difference and help portfolios outperform.
This week that ETF rose 7.1% through the open today, and this morning it was up another 2% to new 52 week highs as of this writing.
No one knows when the Chinese will stop devaluing the yuan, but if they don’t stop we could see another full on August meltdown in the coming days, and this ETF is protection to consider, even at this point.
Onshore Yuan vs. Offshore Yuan
One of the more concerning events over the past 48 hours has been the widening gap between the “offshore” yuan (CNH) and the “onshore” yuan (CNY). Since the yuan began to decline early Monday, the spread between the two has widened to 2.5%, a record amount.
The difference between the two, as the names imply, is that the onshore yuan trades only in mainland China and is subject to the daily range set each day by the PBOC. The offshore yuan trades in Hong Kong, London and other Asian cities, and is not subject to the trading band—it’s (mostly) a free-floating currency used in international trade.
With the spread being allowed to widen so much it’s causing fears to rise that Chinese officials are simply giving up trying to keep the two close (they can buy offshore yuan to support it) and that again reinforces the idea that Chinese authorities are simply in over their heads.
Regardless, the widening of this spread is not a vote of confidence for Chinese authorities nor does it imply the yuan is about to stabilize. So, CNH (offshore yuan) needs to stabilize first, so that’s the new leading indicator we are watching.
Overnight, the spread between offshore and onshore yuan actually compressed a bit as it’s believed Chinese authorities bought offshore yuan to support it, but while that’s an improvement, it’s not stabilization.
We will continue to watch the “offshore” Yuan each night for evidence of stabilization and that includes tonight (what the yuan does this evening will be very, very important). Our subscribers will know at 7 AM tomorrow the updated outlook for the yuan and, by default, US stocks.
If your brokerage firm research hasn’t explained the China scenario as well as we have through these abbreviated email excerpts, please consider becoming a subscriber.
This is what we do. Every day. We provide value, charge a reasonable price, and have no longer term commitment and that’s why our business is growing.
Jobs Report Preview
Believe it or not, there’s actually a jobs report tomorrow, and it’s an important one!
The key for this jobs report is whether the likelihood of a March rate hike increases (negative for stocks, because it’ll push the dollar higher) or decreases (positive as long as the data isn’t too bad). In a way it’s a throwback to “good” data being “bad” for stocks in so much as it’ll pressure the dollar further. So, a “Too Hot” number is the most negative outcome for stocks very near term.
“Too Hot” Scenario (Increased Likelihood of March Hike)
· > 225k Job Adds, < 5.0% Unemployment Rate, > 2.5% YOY wage increase. A jobs number this strong would cause the dollar to move higher because it would significantly strengthen the case for a March hike (a January hike is off the table). That, in turn, would further pressure oil and stocks. While not nearly as important as the headline job adds, if we see the unemployment rate drop below 5% or wage inflation accelerate further that also will strengthen the case for a March hike.
Likely Market Reaction: Dollar up (big), everything else down. Stocks, bonds and commodities would drop sharply as this is not at all priced into stocks.
“Just Right” Scenario (Reduced chance of March hike and increased chance of June hike)
· 125k-175k Job Adds, 5.0% Unemployment Rate, 2.1%-2.3% YOY wage increase. What the market needs right now is a number that reflects a strong jobs market, but that does not imply accelerating wage inflation.
Likely Market Reaction: Stocks should rally (assuming the yuan is stable) given how oversold they are, and the dollar should decline decently given the recent run up. Bonds and commodities should trade flat. This is the most benign and positive outcome for stock bulls.
“Too Cold” Scenario (no hike till June at earliest)
· < 100k Job Adds. “Bad” may be good again short term, but given the weakness in other economic data points in December (particularly manufacturing), a number like this would be “Too Bad,” as it would reinforce concerns the US economy is rolling over and that the Fed waited too long to hike.
Likely Market Reaction: Bonds should surge, stocks should drop after an initial dovish pop, commodities would surge and the dollar would collapse (probably down close to 2%.)