THE TICKER

It was another white-knuckle day on Wall Street, as trade tensions rubbed already raw investor nerves and sent stocks and Treasury yields pinballing to scary lows before both rallied in the afternoon. 

The Dow Jones industrial average fell 589 points in morning trading, all but recovering those losses by the close. And the yield on 10-year Treasury bonds at one point dropped to a low not seen since just before President Trump’s election — a result of rattled investors seeking the relative safety of government debt. The same impulse drove gold briefly above $1,500 an ounce, a six-year high. 

The moves point to fears that a recession could be imminent as the worsening U.S.-China standoff further weighs on sputtering global growth.

Investors will be keeping a close eye on Chinese currency for any sign the country is moving to weaponize the yuan in the trade war. China’s central bank fixed the yuan for Thursday at a level weaker than the 7-to-the-dollar threshold it hasn’t breached since 2008 — though Bloomberg's Tian Chen reports that level is actually stronger than analysts expected, providing traders some reassurance after a bumpy week. The central bank set a slightly stronger midpoint for the currency on Monday, but it ended up trading at more than 7 per dollar, prompting the Treasury Department to retaliate by taking the rare if largely symbolic step of labeling the Chinese currency manipulators. 

It was central banks for three smaller economies that touched off the market action Wednesday. Monetary policymakers in India, Thailand and New Zealand all announced surprisingly steep interest rate cuts. Investors and economists interpreted the cuts as bids to shore up those economies in the face of the trade war’s gathering force. But the moves also weakened the nations’ currencies against the dollar and could signal the start of the sort of race-to-the-bottom rate-cutting spree that develops into a currency war. 

“There’s a lot of chatter about explicit intervention in foreign markets,” Derek Tang, an economist at LH Meyer Inc., an economic-forecasting firm, tells me. “We’ll definitely be watching the interplay between different countries' monetary policies … The initial cause of a currency war would be trade tensions between the U.S. and China, and other countries trying to respond. But these things could take on a life of their own.”

Trump insisted via Twitter on Wednesday that the Fed is more of a culprit than China for weakening his administration’s hand in the trade standoff. Amid other demands, he called on the central bank to stop selling off its $3.8 trillion asset portfolio, a process known as quantitative tightening that the Fed in fact ended last week: 

But of course China will be a key player in determining where the trade conflict goes next. “I would say that the key player here would be China, in that China could easily let go of its managed currency regime and let the yuan fall further,” Sara Johnson, executive director of global economics at research firm IHS Markit, tells me. “That would in turn trigger other moves by Asian countries to stay competitive.”

Johnson doesn’t think the U.S. economy is as vulnerable as, say, Morgan Stanley says it is: The bank’s chief economist predicts that if Trump ramps up tariffs to 25 percent on all Chinese imports, the domestic economy will slide into a recession within nine months. But she said “markets also need to be cautious, because clearly there’s no resolution of the U.S.-China trade war in sight. This could drag out for a longer period of time, and we’re certainly worried about the escalation of tariff rates and other protectionist measures.”

Others paint a more dire picture. Former Treasury Secretary Larry Summers in a Wednesday interview with Bloomberg TV rated the risk of a recession at 50/50 and said it is “much higher than it needs to be and much higher than it was two months ago… You can often play with fire and not have anything untoward happen, but if you do it too much you eventually get burned.”

MARKET MOVERS

— Investors have no idea how this ends either: “Trump’s trade war comes with an aggressive and clear-cut strategy but a fuzzy endgame, namely that it’s unclear just what victory would look like,” CNBC’s Jeff Cox reports.

  • Key quote: “If you want to be successful, you have to be strategic,” Steven Blitz, chief U.S. economist at TS Lombard. “Be very clear what the point is, how you want to get it, what is the victory. Because the fact is, you’re asking this question and I can’t even tell you what victory is.”    

But there's good reason to expect more big stock selloffs. WSJ's Akane Otani: "Bad news for those hoping for calmer trading ahead: History shows that big one-day drops in the stock market are often followed by further sizable pullbacks. Stock declines of 3% or more like Monday’s, while relatively infrequent, tend to occur in clusters when they happen, Instinet analyst Frank Cappelleri found in an analysis this week...

"Of the five years since 2010 when the stock market dropped 3% or more, there was only one year when that drop was the only one of its size for the year. That means the S&P 500’s 3% drop Monday, its first drop of that size this year and its biggest slide since December, will likely not be the last of its kind in 2019."

Pimco says Treasury yields could go negative. Bloomberg's Vivien Lou Chen: "Pacific Investment Management Co. has joined the chorus of voices warning that U.S. Treasury yields may eventually go negative, adding to a pool of assets that surpassed $14 trillion last month. In a blog post Tuesday, Joachim Fels, global economic adviser at the fixed-income investing giant, said it’s “no longer absurd to think that the nominal yield on U.S. Treasury securities could go negative.” At least 11 countries have negative 10-year yields, and Germany’s 30-year yield joined the rest of its curve below zero last week."

Credit-grading firms are giving out increasingly optimistic appraisals as they fight for market share in booming debt-securities markets. “We don’t trust the ratings.”
WSJ
TRUMP TRACKER

TRADE FLY-AROUND: 

— White House moves forward on Huawei ban: “The White House is expected to start implementing provisions of a law that bars the U.S. government from doing business with Huawei Technologies Co., moving ahead despite the Chinese telecommunications giant’s efforts to block the rule in court,” the Wall Street Journal’s Catherine Lucey and Dan Strumpf report.

“The Office of Management and Budget issued an interim rule this week laying out steps to ensure U.S. government agencies aren’t doing business with Huawei and several other Chinese companies … Huawei said the news was ‘not unexpected’ and it would continue to “challenge the constitutionality of the ban in federal court.”

  • Meanwhile, Trump continues to slam China: “Trump on Wednesday said his tough stance on China’s economic and trade policies would ultimately benefit the American economy, even as Beijing signaled it could strike back by curbing sales of chemicals known as rare earths that are used in everything from iPhones to military equipment,” Reuters’s Nandita Bose and Andrea Shalal report.
  • Chinese exports rise. FT's Alice Woodhouse and Tom Hancock: "Chinese exports rose in July, beating expectations for a fall, while imports fell by less than predicted in a sign of China’s resilience in the face of an increasingly bitter trade war with the US. Exports grew 3.3 per cent year on year in dollar terms, according to Chinese customs data, bouncing back from a 1.3 per cent decline in June."

— U.K. pushes hard for trade deal with U.S.: “British Prime Minister Boris Johnson’s government launched a charm offensive in Washington this week in a bid to secure a trade deal with the U.S. quickly after the U.K. leaves the European Union,” WSJ’s Max Colchester and Anna Isaac report.

“British officials hope a quick deal would cover some sectors, while more contentious aspects could be settled and fleshed out at a later date. Such a deal could be an early win for Britain as it resets its global trading ties after Brexit. In a statement, the British trade department said it wanted to negotiate an ‘ambitious trade deal with the U.S. as soon as possible.’”

Banks give Congress documents on Russians possibly connected to Trump. WSJ's Jean Eaglesham and co.: "Major Wall Street banks have given congressional committees investigating President Trump thousands of pages of documents related to Russians who may have had dealings with Mr. Trump, his family or his business, people familiar with the congressional probes said. Some banks are also giving documents related to Mr. Trump’s business, the Trump Organization, to New York state investigators, people familiar with the New York investigation said...

"Wall Street firms including Bank of America Corp., Citigroup Inc., Deutsche Bank, JPMorgan Chase & Co., Morgan Stanley and Wells Fargo & Co. have recently provided thousands of financial documents related to Russians who may have had dealings with Mr. Trump or his family or his business to congressional investigators...More information will likely be handed over in coming weeks as the banks continue to respond to subpoenas sent in April, the people said.

"Separately, Deutsche Bank, Mr. Trump’s primary bank, has turned over emails, loan agreements and other documents related to the Trump Organization to the office of New York Attorney General Letitia James, in response to a civil subpoena sent earlier this year, according to people familiar with the New York investigation."

POCKET CHANGE

— Billionaire Stephen Ross faces backlash over Trump fundraiser: “News of an upcoming fundraiser for [Trump] at the swanky Hamptons home of billionaire Stephen Ross drew swift backlash Wednesday from prominent customers of Ross’s luxury fitness brands and a player for the Miami Dolphins, the National Football League franchise Ross owns,” my colleague Michelle Ye Hee Lee reports.

“Some high-profile LGBTQ activists and celebrities took to social media to call for a boycott of Equinox Fitness clubs and SoulCycle over the fundraiser, which was organized to support Trump’s reelection and comes with a price tag as high as $250,000 for an audience with the president.”

Dolphins receiver Kenny Stills:

Ross put out a statement Wednesday night, per the Miami Herald’s Adam Beasley. Ross said that while he and Trump “agree on some issues, we strongly disagree on many others.”

— Walmart employees to stage walkout over gun sales: “Hundreds of white-collar Walmart employees are expected to walk out Wednesday afternoon to protest the retailer’s gun policies after shootings at two company stores left 24 people dead,” my colleague Abha Bhattarai reports.

“Workers at Walmart’s e-commerce offices in San Bruno, Calif., Portland, Ore., and Brooklyn are taking action to urge the world’s largest retailer to stop selling guns and discontinue donations to politicians who receive funding from the National Rifle Association. Walmart sells guns in about half of its 4,750 U.S. stores, making it one of the nation’s largest retailers of firearms and ammunition.”

  • Visa CEO says it won't block gun purchases. CNBC's Jasmine Kim: "Visa will continue to facilitate gun purchases as long as it is legal for people to buy firearms, the chief executive of the credit card giant told CNBC on Wednesday. 'We are guided by the federal laws in a country, and our job is to create and to facilitate fair and secure commerce,' said Visa Chairman and CEO Alfred Kelly... Payment companies PayPal and Square do not allow their services to be used for gun sales."

— Hedge fund managers should stick to their day jobs: “Barneys New York owner Richard Perry isn’t the only deep-pocketed money manager to watch over the decline of a storied retailer,” WSJ’s Lauren Silva Laughlin reports.

“Retail disasters are by no means unique to the hedge-fund world … Turnarounds are tough to get right, but the stain on the track records of the masters of the universe is noteworthy. Some hedge-fund managers reckoned that their stock-picking ability would translate into management insight. The retail industry proved as much a blow to their egos as their net worth.”

— No lift for Lyft despite strong earnings: “Lyft, the second most popular ride-hailing platform in the U.S., just reported earnings for the quarter ended June 20,” CNBC’s Lora Kolodny reports. “Shares in the company climbed as much as 13% after hours, but gave up early gains after the company announced share lock-ups would expire on August 19, 2019 rather than a previously scheduled date in September.”

— Night of the living debt: “Debt collectors lose the right in many states to sue consumers after three or more years. But there’s a loophole: If the consumer makes a payment, even against his or her own will, that can be used to try to revive the life of the debt,” my colleague Renae Merle reports of this zombie debt.

“The effort to revive … old debt was part of what consumer advocates and financial experts say is an accelerating effort within the $11 billion debt collection industry to make profits from debts that the financial industry once wrote off. The practice could prove increasingly profitable as the country’s consumer debt reaches record levels — more than $4 trillion this year — and the industry is able to bring in ‘tens of billions of dollars’ from debt past the statute of limitations every year, according to a report by the Receivables Management Association International.”

— Mattis joins General Dynamics board: “Former defense secretary Jim Mattis has been elected to the board of General Dynamics, the company announced after a vote on Wednesday, allowing him to reclaim a powerful position at the top of America’s defense industry,” my colleague Aaron Gregg reports.

“The announcement comes at a time when General Dynamics ― one of the last military-industrial conglomerates remaining from the industry’s Reagan-era heyday ― is trying to remake itself for the information age. Last year, the company sealed a deal to buy CSRA, a massive Beltway IT contractor, for almost $10 billion. It is the fourth-largest corporate recipient of U.S. government contract dollars.” 

The shipping giant is distancing itself from Amazon as it builds its own logistics operation.
Jonnelle Marte
MONEY ON THE HILL

Dems tell Mnuchin not to cut cap gains. The Hill's Naomi Jagoda: "Forty-two Democratic senators are urging the Trump administration against taking unilateral action to cut capital gains taxes after a group of Senate Republicans last week pressed the administration to do so. 'This unilateral move would almost exclusively benefit the wealthiest Americans, add to the ballooning federal deficit, further complicate the tax code, and ignore longstanding Justice Department policy,' the Democrats wrote in a letter Wednesday to Treasury Secretary Steven Mnuchin."

— Jones says Congress may step in if trade war continues: “Alabama’s Democratic Sen. Doug Jones criticized [Trump’s] escalating trade war with China on Tuesday, hinting at bipartisan congressional action to check the president as his state becomes more exposed to the crossfire between Washington and Beijing,” CNBC’s Amanda Macias and Jacob Pramuk report.

“If this doesn’t change soon, I think Congress may end up acting. There’s bills that I’ve got pending with Senator [Lamar] Alexander and Senator [Rob] Portman and I think if this doesn’t end soon, Congress is going to start stepping in more than they have in the past,” Jones said of legislation he is working on with two Republicans. 

DAYBOOK

Today:

  • CBS Corp., Kraft Heinz, Yelp Inc., Lions Gate Entertainment and Party City are among the notable companies reporting their earnings, per Kiplinger.
THE FUNNIES
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