Wall Street Warns of Mounting Recession Risk From Trade War

By Will Mathis  and Enda Curran

June 2, 2019, 6:42 AM PDT Updated on June 3, 2019, 12:50 AM PDT

  • Morgan Stanley chief economist says markets not fully prepared

  • Goldman revises trade war assumptions, reduces GDP forecast

Wall Street’s biggest banks lined up to warn investors of growing recession risks from the escalating trade war between the U.S. and China.

A global recession could start within nine months if President Donald Trump imposes 25% tariffs on an additional $300 billion of Chinese exports and Beijing retaliates, according to Morgan Stanley. Separately, JPMorgan Chase & Co. said the probability of a U.S. recession in the second half of this year had risen to 40% from 25% a month ago.

"Recent conversations with investors have reinforced the sense that markets are underestimating the impact of trade tensions," Chetan Ahya, chief economist at Morgan Stanley, wrote in a report. "Investors are generally of the view that the trade dispute could drag on for longer, but they appear to be overlooking its potential impact on the global macro outlook."

Such warnings may set the tone for financial markets and will inform this week’s gathering in Japan of the Group of 20 finance chiefs. The potential for a marked slowdown in the world economy was underscored Monday by weakening manufacturing gauges across Asia.

Government bonds yields have tumbled this year as investors moved to price in an economic slowdown and central bank easing -- and a key recession indicator, the gap between three-month and 10-year Treasury rates, is sending the strongest warning sign sinice 2007. Yet strategists at JPMorgan and Citigroup Inc. see scope for even lower yields.

“Global growth now looks likely to slip below trend for the rest of this year,” JPMorgan Chief Economist Bruce Kasman and colleagues wrote in a report.

Also sounding the alert, economists at Goldman Sachs Group Inc. said they now expect the U.S. to impose 10% tariffs on the remaining $300 billion-worth of imports from China and on all Mexican goods, too. The bank lowered its U.S. second-half growth forecast by about half a percentage point to 2% and said its sees a greater likelihood of interest-rate cuts from the Federal Reserve.

"While it is a close call, the outlook has not yet changed enough for cuts to become our baseline forecast," Goldman analysts led by Chief Economist Jan Hatzius said in a note.

The rift between the Trump administration and China has escalated as each side blames the other for the breakdown in talks. The trade war is also taking on a global dimension amid simmering tensions between the U.S. and the European Union, while Trump is threatening to impose tariffs on Mexican goods in response to illegal immigration.

Morgan Stanley’s Ahya advised clients that if the conflict continues, growth will suffer as costs increase, customer demand slows, and companies reduce capital spending.

Analysts at Citigroup recommended investors buy U.S. Treasuries, noting the last time the world economy looked as it does now was at the start of 2016 -- which was followed by a meaningful slowdown worldwide.

“That episode may provide a useful blueprint for the coming months,” said Mark Schofield, Citigroup’s director of macro strategy. “The U.S. economy has been resilient up to now, however, persistent themes of softening tailwinds in the form of declining fiscal stimulus and strengthening headwinds in the form of trade tensions and China slowdown, are a threat.”


Gold hits 10-week peak as trade fears spur safe-haven interest

PUBLISHED SUN, JUN 2 2019  10:14 PM 

Gold jumped more than 1% on Monday to its highest in more than nine weeks on worries that U.S.-Chinese trade tensions and Washington’s threat of tariffs on Mexico would hurt the global economy.

Spot gold climbed 1.1% to $1,319.24 per ounce, after touching its highest since March 26 at $1,319.63.

U.S. gold futures rose 1% to $1,324.50 an ounce.

“There are concerns still surrounding the trade wars, whether it be surrounding the tariffs with Mexico or the tariffs with China. There is a ‘flight to safety’ buying going into metals,” said Bob Haberkorn, senior market strategist at RJO Futures.

Relations between the United States and China got another jolt when the two nations clashed again at the Shangri-La Dialogue in Singapore on Sunday.

Mexican Foreign Minister Marcelo Ebrard said U.S. President Donald Trump’s threat of punitive tariffs on Mexico would be devastating and would not stop waves of Central American migrants from crossing the southern U.S. border.

Equity markets bore the brunt of the two-pronged tariff threat from the United States, while safe-haven assets such as the Swiss franc and gold have been hefty beneficiaries.

Adding to woes, factory activity contracted across Asia and Europe last month on fears of a global economic downturn.

Furthermore, U.S. manufacturing growth slowed further in May to its weakest pace in more than two-and-a-half years, a national purchasing managers’ survey showed on Monday.

“There is some talk now that the Fed is going to cut as much as half a basis point at some point this year,” Haberkorn added.

Lower interest rates increase the opportunity cost of holding gold, and any indication of a rate cut is read as adding to the metal’s appeal.

“Technically, the gold bulls have gained the overall near-term technical advantage and have momentum now. Bulls’ next upside price objective is to produce a close in June futures above solid resistance at $1,335.70,” Jim Wyckoff, senior analyst at Kitco, said in a note.

Signifying an uptick in investor sentiment towards the metal, speculators increased their net long positions in COMEX gold in the week to May 28, data showed.

Holdings of SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, rose 0.32 percent to 743.21 tonnes on Friday.

Silver rose 1.3% to $14.76 per ounce. The metal touched an almost three-week high of $14.79 earlier in the session.

Palladium fell 0.2% to $1,322.06 per ounce, while platinum was 2.3% higher at $809.70 per ounce, having touched a one-week high at $816.05 earlier in the session.


Silver: Sleeper Rally Setup Playing Out?

By Chris Vermeulen Market Overview 11 hours ago (Jun 03, 2019 12:02AM ET)

Our research team believes Silver could be the Sleeper Rally setup of a lifetime for investors if the global economic cards continue to get scattered and crumpled over the next 10+ years. The recent rally in Gold got a lot of attention last Friday (the end of May 2019).

We had been warning about this move for the past 8+ months and generated an incredible research post in early October 2018 that clearly highlighted our belief that Gold would peak above $1300 early in 2019, then stall and move toward $1270 near April/May 2019, then begin an incredible upside price rally in June/July/Aug 2019. We couldn’t have been more clear about this prediction and we posted it in October 2018.

Now, our research team is going to share with you some incredible insights into what may become the most incredible trade setup we’ve seen in the past 12+ years – the Sleeper Silver Setup.

As incredible as it might seem, we believe Silver is setting up another High Price Breakout pattern that should conclude within the next 2 to 4 months with a price high near $22.50 to $24.00 (see our proprietary Fibonacci price modeling projections below). After this peak is reached, hold on to your hat because we believe the upside price rally could mimic past rallies and attempt to immediately move the price of Silver to well above $85 per ounce.

Ultimately, we can only guess as to where the top of this move may end – but we can safely estimate it will likely top somewhere between $90 and $550.


Stock bulls are telling themselves a lot of lies about this market

Published: June 4, 2019 7:42 a.m. ET  By Mark Hulbert  MarketWatch 

The U.S. stock market is overvalued now, period.

That would be worth keeping in mind at any time, of course, but especially now with the major market averages significantly off their late-April peaks. If current valuations were reasonable, then we could count on them to provide a safety net below this market.

Unfortunately we can’t. Yet many stock-market bulls contend that such a safety net does exist. Some are arguing that the stock market correction in late 2018 worked off many previous valuation excesses. One adviser I monitor contended that “valuation metrics [in late April] for the S&P SPX, +1.51%  [were] much lower than where they were last year.”

I disagree. Though valuations did improve between the market’s late-September and late-April peaks, the improvement was so slight as to barely improve equities’ outlook. Consider perhaps the most popular valuation measure: The price/earnings ratio. At the S&P 500’s late-September peak, the P/E ratio based on trailing 12 months as-reported earnings stood at 22.5. At its late-April peak, in contrast, it stood at 21.9 — less than 3% lower.

To understand how modest a decline that is, consider a simple econometric model that uses the P/E ratio to predict the S&P 500’s inflation-adjusted total return over the subsequent 12 months. I constructed this model using data back to 1871 from Yale University finance professor (and Nobel laureate) Robert Shiller. The reduction in P/E from September to April translates into an increased forecasted return of just 6 basis points.

Good luck with that. The message of other valuation measures is similar. Consider five on which I also focused for this column: The cyclically-adjusted P/E ratio (or CAPE), made famous by Yale’s Shiller; the price-to-book and price-to-sales ratios; the dividend yield, and the Q-Ratio (calculated by dividing market value by the replacement cost of assets). The accompanying chart shows the percentage of past bull market peaks that had lower valuations than what prevailed at the market’s late-April high.





Notice that the market at that high was more overvalued than it was at anywhere between 86% and 100% of past bull market peaks (depending on which valuation measure used). The overwhelming message: Don’t look to valuations to cushion any decline.

This doesn’t mean that a bear market began at its late-April peak, of course. The stock market has been overvalued for a number of years now and, for the most part, has continued to produce impressive returns. What the valuation measures do mean is this: You’re on shaky ground if you have been giving the bull market the benefit of the doubt because of its allegedly reasonably valuation. You either need to find some other reason to be bullish, or to reduce your bullishness.


‘Buckle up!’ When oil and gold trade like this, it usually spells doom for the market

Published: June 4, 2019 3:21 p.m. ET  By Shawn Langolis   MarketWatch

Oil prices CL.1, -1.65% are hovering around bear-market levels amid concerns over slowing global growth and the potential for tariffs to sap energy demand.

Gold GC.1, +0.70% meanwhile, has been heading in the other direction. Some of the same factors keeping pressure on oil have led gold to a five-session winning streak that’s propped up prices to levels not seen in more than a year.

This combination of rising gold and falling crude — rare as to the extent of the divergence — has delivered to some nasty consequences for the broader market over the years, as you can see by this illustration:

“Only three other times in history precious metals surged while oil plunged! All of them happened during severe bear markets and recessions,” he posted on TwitterTWTR, -0.06% this week. “Buckle up, folks.”

Costa went on to explain to MarketWatch that the current macro setup looks a lot like the beginning of the selloff in the fourth quarter of 2018.

“Gold-to-oil ratio surging, copper prices getting annihilated, corporate spreads widening, and credit markets screaming recession ahead,” he said. “The Fed’s utterly dovish comments just add to this list. Rate-cuts when late in the business cycle have never been a bullish sign. It reaffirms the many bearish macro signals we have been pointing out. Economic conditions are weakening in the face of asset bubbles everywhere.”

Crescat logged a fantastic year in 2018, capitalizing on December’s market tumble to post a 41% return for its flagship hedge fund — good enough to make it one of the firm’s two entries on this Bloomberg list of top performers.

While it’s been a tougher stretch for Crescat Capital in 2019, with the stock market rebounding to start the year, Chief Investment Officer Kevin Smith, who oversees $48 million, is confident the chips will start falling in his direction. The latest action in oil and gold isn’t hurting.

“The stock market is susceptible to bouts of bullish sentiment,” he recently told MarketWatch. “There is a speculative force typical of late-cycle markets that is willing to shrug off deteriorating economic data and a dashed trade deal with China. Too many want to drive that momentum train just a little bit longer. They are not deterred by arguments of excessive valuations.”


Gold Prices Rise on Rate Cut Expectations, IMF Warnings

Investing.com  June 6, 2019 

Prices of safe-haven gold rose for a seventh-straight day on Thursday in Asia, getting some residual support by expectations that the Federal Reserve will have to cut rates this year to maintain economic growth.

Gold futures for August delivery, traded on the Comex division of the New York Mercantile Exchange, were up 0.2% at $1,333.60 per ounce by 12:43 AM ET (04:43 GMT).

The August gold contract has now gained around 4% since May 29. Expectations of a rate cut by the Fed, worsening Sino-U.S. trade relations and unexpected tariffs on Mexican goods were cited as tailwinds for the safe-haven gold.

Federal Reserve Chairman Jerome Powell said in a speech that the central bank will do what it takes to retain the near-record expansion of the U.S. economy, amid President Donald Trump’s trade wars.

The International Monetary Fund’s warning that China’s growth could slow next year amid the trade war with the U.S. further dented investor sentiment and sent gold prices even higher.

The IMF said it expects the world’s second-largest economy’s growth to slow to 6% next year, and to 5.5% by 2024 after Sino-U.S. trade negotiations took a turn for the worse last month.

U.S.-China tariffs, that have been both implemented and proposed, could cut global economic output by 0.5% in 2020 and would cause some $455 billion in gross domestic product to evaporate, the IMF warned.


The Looming Recession Will Be Worse Than 2008

June 05, 2019, 08:37:46 AM EDT By Safehaven

Good times can’t last forever – and the fear of a recession seems to be growing stronger by the day, with both Morgan Stanley and Goldman Sachs saying this week that the worst yet to come with a global trade war that is spiraling out of control.

A recent public survey by the National Association for Business Economics puts recession fears into even sharper relief. The Q2 survey of 53 economists has 60 percent of respondents fearful that there is a risk of recession by 2020, while 15 percent said that a recession will begin this year, and some 33 percent predicted a recession mid-way through next year.

More specifically, 56 percent cited increasingly protectionist trade policy as the most significant risk to the U.S. economy.

A slowdown in factory activity last month across the U.S., Europe and Asia is perhaps the first sign of a global recession amid a trade war between the U.S. and China, Trump’s new tariff threat against Mexico, and the Brexit drama. And to top this off, there isn’t exactly a high level of enthusiasm for the upcoming G20 summit in Japan - a venue in which Washington and Beijing would hope to reduce trade tensions.

If they fail, the world’s central bankers will adjust their monetary policy to support a deteriorating economy, and thus the vicious circle begins.

The World Economic Forum, which hosts the high-profile power leaders and countries at Davos, in an annual Global Risk Report for 2018, said it feared that the next recession could be even worse than 2008 - and the trade war has grown out of control since that report was released.

“Central banks were crucial to restoring economic confidence among households, businesses and markets after the crisis. Repeating that feat could be a struggle without interest rates at their disposal. And without a floor placed under confidence, the risk of the next downturn being much deeper and longer than might otherwise be the case would increase,” the WEF wrote.

Increasingly, experts and finance giants are sounding the alarm bells over a trade war that could be the trigger for a global recession.

According to Chetan Ahya, Morgan Stanley’s chief economist and global head of economics, “If talks stall, no deal is agreed upon and the U.S. imposes 25% tariffs on the remaining $300 billion of imports from China, we see the global economy heading towards recession.”

Echoing this sentiment, JPMorgan puts a 40-percent chance on a recession in the second half of this year. Last month it predicted only a 25-percent chance.

Nor is Goldman Sachs being quiet about it, lowering its second-half growth forecast by 0.5 percentage points to 2 percent, while cutting Q2 GDP growth forecast to 1.1 percent, down from 1.3 percent just 10 days ago, citing the “scale and scope of the trade war”.

Corporate profit forecasts are also taking a hit. On Monday, both Bank of America and Citigroup lowered their U.S. corporate profit forecasts, citing the risk of recession due to escalating trade tensions Bloomberg reported. BofA cut its 2019 estimate for S&P 500 companies by $2 a share to take the costs of tariffs into account, and Citi’s chief equity strategist followed suit.

By Josh Owens of Safehaven.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


Chart signals double-digit rally for gold

June 7, 2019 CNBC   Pippa Stevens 

The gold trade is shining bright.

Investors rushed into the commodity on Thursday, pushing it to a four-month high. Gold is now just 1% away from its 52-week intraday high of $1,349.80 from February, and TradingAnalysis.com’s Todd Gordon believes it may soon surpass that level.

After examining the charts, he says bullion could climb as high as $1,500.

Gordon points out that gold rallied from $250 in 2001 to nearly $2,000 in 2011 but has been stuck in a trading range since then.

Gold has been steadily climbing this year and is now trading around a key level that has provided resistance in the past. Since the commodity is knocking at former highs, Gordon believes that “the next $60” will see a lot of “buy stops going off,” which is when traders place orders ahead of time to buy something once it hits a specific price.

This activity, Gordon believes, could lead to an acceleration in gold’s climb, lifting it back to former highs and maybe even as high as $1,500.

In addition to gold looking attractive on a technical basis, Gordon notes that the current economic backdrop of a dovish Fed, a weak dollar and a rise in geopolitical tensions supports a boom in the commodity. “There’s a strong correlation right now with gold and bonds,” he said, noting that if rates continue to fall it will “help push” gold out of its current consolidation. “Lot of ... reasons for gold to push up, so I’m looking to add to my portfolio,” he said.

Gold has traditionally been viewed as a “safe haven” asset — something investors buy during times of market uncertainty to hedge against declines in the broader market. Gold owners argue that there will always be a demand for the commodity, so they believe it will retain its value.

Like Gordon, Point View Wealth Management’s John Petrides believes investors should have exposure to gold as part of a well-diversified portfolio. Rather than buy the commodity outright, he suggests using a vehicle like the VanEck Vectors Gold Miners ETF.

“The commodity itself doesn’t throw off any cash flow. There’s no economic value to it, so through the miners at least you can get a dividend and they can control costs and their margins,” he said Thursday on CNBC’s “Trading Nation.”

Petrides argues that a position in gold can protect against a black swan event, and that with the current rising jitters in the market, now is a good time to accumulate a position.

“You want to start with a 2.5% - 3% position of a portfolio now because you just don’t know when those issues [geopolitical risk with Iran, cracks in the ECB, etc.] will come to roost. So when they do at least you’re prepared and you don’t have to react,” he said.



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