Now that the FOMC meeting is behind us, the full reality of another rate hike hit the stock market hard this week, right as trade war concerns flared up. All the major indexes are down sharply for the week, with U.S. Treasuries surging.
Stocks have been trading in this no-man's land in between the 50-day and 200-day moving averages, with 60% of stocks in poor shape. The recent sell-off pushes the indexes a step closer to testing longer-term support again at the 200-day moving averages by month's end.
With this week's rate hike, it is not surprising to see a sharp reversal of the 10-year Treasury bond yields at the 3% level and at the top of the channel line, as investors sold stocks and sought safety in T-bonds.
Also weighing on the market was the tariff announcement from President Trump on at least $50 billion of Chinese imports - particularly targeting aerospace, information, and communication technology and machinery - after studies have shown that China has been actively engaged in theft to steal technologies and intellectual properties from U.S. companies.
China is threatening to retaliate by hitting U.S. agricultural exports with tariffs on soybeans, sorghum, and live hogs, thus igniting a trade war. Meanwhile, the EU secured temporary exemptions from U.S. steel tariffs.
Why is Trump putting tariffs on China now?
China is getting set to begin trading oil in the petro-yuan future contracts soon, bypassing the petrodollar, which is also a breach of international law under the Bretton Woods agreement. China has been setting this up with Russia going back to when Russia received oil sanctions for taking Crimea.
China is the largest oil-consuming nation in the world, and to bypass the petrodollar is a direct economic attack on the United States in breach of the Bretton Woods agreement. I would suggest looking up the Bretton Woods agreement to get a better understanding of this global agreement that is directly tied to trading within the international financial system.
President Trump's decision to levy tariffs on China was in the works long before he came into office. Thus, the combination of another rate hike and the beginnings of a trade war weighed heavy on the market on Thursday.
Meanwhile, it isn't just the United States' stock market that is looking weak. International markets are also breaking down.
Notice the German Dax Composite is now in real trouble.
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Germany's major stock market has just flashed a "death cross" as the 50-day moving average has crossed below its 200-day moving average. German banks are in deep trouble with a rising interest rate environment, given so many EU bonds were issued with negative yields. This is collapsing German bonds and damaging the financial wealth of German banks.
Notice how ugly Deutsche Bank looks now.
Deutsche Bank is fighting for survival and presents significant systemic financial risk from a global perspective - even many of the largest U.S. banks are now at risk because of Deutsche Bank.
Credit Crisis Looming
We are beginning to see the early stages of another bank credit crisis.
When a bank credit crisis begins to emerge, banks begin to mistrust each other because they lie to each other about how financially stable they are regarding their balance sheets and the risk they're exposed to. A spike in the Libor OIS spread of what rate banks lend to each other now needs to be watched closely. Now is not the time to be flipping houses - just as mortgage applications plunge!!!
Investors must understand our economy is frail. Corporate earnings growth has largely been illusionary based on corporate buybacks, which reduce shares outstanding and artificially boost earnings per share.
We have more debt than at any time in history! I apologize for the recent daily report where I wrote that since 2008 we have seen global debt grow to $100 billion. I meant to write it grew by $100 TRILLION. Furthermore, we have the most leverage in history.
With global debt of $100 trillion, I think we have to take this with great soberness.
To your wealth,
Dennis SlothowerEditor, Stealth Stocks Daily Alert and Wall Street's Underground Profits
Dennis Slothower has been leading a small but profitable group of investors to some extraordinary profits in both good markets and bad over the course of a 38+ year investment career, starting as a stock broker in 1979. In 2011 Dennis was named the top performer by Hulbert Financial Digest for avoiding the Crash of 2008. Now, he is bringing his extensive experience to the public through Outsider Club, Stealth Stocks Daily Alert, and Wall Street's Underground Profits. For more about Dennis, check out his editor page.