You may call it as you want, but in the last two weeks, we witnessed unprecedented political changes on several key fronts. I call it a political “Cosmic Alignment.”
First, we just got a sort of a trade deal or more like a truce between the U.S.and China. After the visit of the Chinese delegation to the U.S., both countries agreed to a temporarily understanding: new Chinese purchases of U.S. agricultural products, a vague commitment for strict Chinese intellectual property practices, and a possible currency agreement of some sort.
If you believe that these conditions look very similar to what they already discussed a couple of months back, then you have been paying attention; they are, but on this opportunity, both parties were ready to close a deal.
This draft of a mini deal is indeed a small step in the right direction, but it is not a long term solution. The relation between U.S. and China is far more complicated, and it will require to develop trust mechanisms to settle their many differences and keep a stable peace environment for the world.
Second, believe it or not, after three years, the U.K and Europe may have found a solution for Brexit that may enable the U.K. to leave the European Union under acceptable terms for both parties.
Third, the Federal Reserve has officially joined other central banks in their efforts to ease financial conditions even more. The Fed money printing race is on!. The Fed will be buying 600 billion USD worth of treasury debt (60 billion USD monthly) until the second quarter of 2020. The Fed warns us several times that “this is not a QE or quantitative easing effort” but it looks pretty much like one.
The main effect of this Fed measure will be to enable more liquidity for banks so they may buy the increasing issuing of U.S. debt that is flooding markets and keep short interest rates (less than a year) under control and within the Fed defined limits. I know what you are thinking; it sounds strange, right?, the U.S. Treasury issue debt, and at the same time, the Fed buys a fraction of it. That is what quantitative easing (QE) is about, monetizing or printing money is the technical term.
And last but not least, the political heat on the Middle East increased to a new level, war is expanding in that continent; the U.S. announced the deployment of troops to Saudi Arabia to support them against Iran aggression; it seems that Saudi Arabia launched a missile attack on an Iran Oil Tanker, and Turkey troops just began a military operation in Syria after the U.S. approved it and retired its forces.
One might think that the price of the oil barrel will reach at least new historical levels, but nothing is far from the truth. The abundant production of oil globally enable by the U.S. shale producers has caused a stable oil market even under these unprecedented risks for several Middle East oil producer companies; the oil market has changed dramatically.
During the week, the Standard and Poors 500 market index was up +1.9%, close to this year's peak of 3,013 of July 26th. The emerging markets equity and the rest of the developed markets equity indexes ended up +2.8% (using IEMG) and +2.9% (using VEA). The U.S. oil price WTI closed at 54.7 USD per barrel last week.
After a week packed with dramatic headlines, we are heading for the third quarterly season of financial reports for the companies included in the S&P 500 index next week; the biggest U.S. banks will report next Tuesday, among many others multinationals companies. Stay tuned.
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Have a productive week!