Today's Log Entry

9/4/19 Wednesday

Stocks, at least in the pre-market, look to be essentially re-setting the start to September; recouping all of yesterday’s decline.

The headlines suggest it’s mostly about the Hong Kong government withdrawing the extradition bill that sparked the protests in the first place. While that’s big for sure, the government is cautioning that while it’s pushing for new dialogue, completely satisfying the remaining 4 demands is a stretch. HK stocks rallied 4% on the news, taking the rest of Asia and global equities with it.

Futures were already in rally mode (roughly halfway there), even before the HK news, on a stronger than expected daily yuan/dollar fixing. As I keep repeating, I find the notion that traders remain braced for a substantial yuan devaluation (due to tariff escalation) to be markedly off-base (at least for now): China absolutely does not want to see huge foreign capital flight, at any time, let alone leading into the National People’s Congress 10-day extravaganza. The latter I suspect also inspired the overnight easing of bank reserve ratios; the Chinese government is notorious for temporary water-calming measures leading into such events.

Another development that is clearly having a positive impact on equities (and hugely positive for the pound) is yesterday’s blow to Boris Johnson: His party lost a member, and, in the process, lost its majority; notably weakening his case for taking the UK out of the EU on 10/31, or any time for that matter, without a trade deal. Also out of Europe comes news that Italy is on the verge of forming a new coalition government that will be viewed as for more business, and EU, friendly.

Meanwhile, Eurozone Services PMI, released this morning, came in slightly better than expected and kept the composite score in expansion territory (above 50), at 51.9; offsetting the sub-50 read from the Manufacturing PMI released yesterday. China also reported a positive services PMI to go with its better than expected manufacturing survey released over the weekend.

While the above presents a welcome respite from the US/China trade war, negotiations nevertheless remains stuck in the mud, if not sinking deeper. While setting a date for September talks would no doubt be good for a couple-hundred+ Dow points, the chasm separating the two sides is wider today than it’s been throughout the entire process.

1:30 pm Update

The UK parliament passed legislation that would stop a no-deal Brexit and Johnson failed in a followup bid for a snap election. I.e., the odds of the UK crashing out of the EU with no trade deal just became markedly lower. The pound is screaming higher as I type (as it did all day).

While the HK news no doubt was a contributor, today’s strong rally (although on notably weak volume!) was more about Brexit.

The fact that bonds and gold rallied as well suggest that today was not an all-out risk-on rally. Clearly, there's huge uncertainty bubbling under the surface...