Market Commentaries

  • Defining a Currency Manipulator According to the U.S. Treasury Department


    Market Overview


    Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 08/09/19. Rates and Economic Calendar Data from Bloomberg as of 08/09/19. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.

    Happening Now                   

    Global capital markets were mostly down for the week as investors continued to wrestle with potential implications of U.S./China trade tensions and central bank interest rate policy. In the U.S., the S&P 500 Index fell to a level of 2919, representing a loss of 0.40%, while the Russell Midcap Index fell 0.32% for the week. The Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, lost 1.32%. On the international equities front, developed markets moved 1.14% lower, while emerging markets fell 2.22%. Finally, the 10 year U.S. Treasury yield closed out the week at just 1.74%.

    We’ve written a number of updates detailing the ongoing saga between the U.S. and China. It’s no secret that negotiations haven’t panned out the way many pundits had expected or hoped, and it now appears that the negotiation path may remain bumpy for a little while longer. Within the last two weeks, the United States has taken steps to label China as a currency manipulator – a move that is all but certain to fracture whatever progress might have been made between the two parties of late.

    The announcement by Treasury Secretary Mnuchin left us wondering what exactly it takes for a nation to be tagged with the currency manipulator label. The following criteria have been taken directly from the U.S. Treasury Department’s May 2019 report titled, “Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States”:

    1. A significant bilateral trade surplus with the United States is one that is at least $20 billion. This threshold captures a group of trading partners that represented three-fourths of the value of all trade surpluses with the United States in 2018. It also captures all trading partners with a trade surplus with the United States that is larger than about 0.1 percent of U.S. gross domestic product (GDP).

    2. A material current account surplus is one that is at least 2 percent of GDP. This threshold captures a group of economies that accounted for more than 90 percent of the value of current account surpluses globally in 2018.

    3. Persistent, one-sided intervention occurs when net purchases of foreign currency are conducted repeatedly, in at least 6 out of 12 months, and these net purchases total at least 2 percent of an economy’s GDP over a 12-month period. The updated criteria will now capture all instances where one-sided purchases are undertaken in half or more of the months of the year. Looking over the last two decades, this quantitative threshold would capture all significant instances of sustained, asymmetric foreign exchange purchases by important emerging markets.

    It’s important to note that a nation must meet each of the three criteria in order to be labeled a currency manipulator. Those only meeting two of the criteria are placed on a “monitoring list” that currently includes Japan, Korea, Germany, Italy, Ireland, Singapore, Malaysia, and Vietnam. Moreover, it seems probable that placing the currency manipulator handle on China is more about gaining leverage in trade negotiations than it is about meaningfully punishing China given the currency manipulator label is largely symbolic and void of any major consequences.

    In addition, Argentina, another emerging market country, roiled global stock markets early this week as Argentina’s peso plummeted and stocks plunged amid concerns about the potential return to power of the country’s populist Peronist movement, which seeks greater state control of the economy and opposes a European Union trade deal according to a Wall Street Jounral article entitled, “Argentine Peso Dives on Concerns About Peronists’ Potential Return”. As a result, it is fair to say that the days of elevated market volatility are not behind us, and we continue to encourage investors to stay disciplined and work with experienced financial professionals to help manage their portfolios through various market cycles within a well-diversified framework that is consistent with their objectives, time-frame and tolerance for risk.

    Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.

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    China Trade
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    MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.

    MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.

    Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.

    ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.

    ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.

    Investors cannot directly purchase any index.

    LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.

    The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.

    The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.

    DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITs that primarily own and operate income-producing real estate.

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