It’s getting hot in here! Stocks fell sharply yesterday as trade fears just wouldn’t go away and the reality of a potential deal failure became a thing again. Traders just could not shake off the fears of a failed deal with China and started to do the math that eluded them on Monday.
WHAT YOU NEED TO KNOW:
1) Tariffs are bad for us all, everyone! With President Trump’s tweet that he was prepared to let tariffs on $200 Billion in Chinese imports go from 10% to 25% and considered adding tariffs to an additional $325 Billion goods, investors have plenty to worry about. With the onset of tariffs last year markets reacted rationally by initially selling off ultimately to be soothed by creative economic math that showed only a mild potential impact on the economy. In reality, most companies affected by the 10% tariff were able to suck it up and avoid passing price increases to consumers which ultimately kept the economy moving along. If the new round of tariffs threatened by the President actually take effect, companies will have a difficult time eating the increase in costs, especially in this delicate state of flat-ish earnings growth. If price increases are passed along to consumers affecting consumption (which represents roughly 70% of GDP), things could get well… rather ugly. Furthermore, an increase in tariffs and failed trade negotiation will hit consumer and corporate confidence (business investment represents another roughly 20% of GDP), which cannot easily be won back. The good news is that the President, faced with the 2020 elections, has every incentive to keep the economy on track and get a deal done with China. Additionally, the Administration most likely has a floor for what they are willing to accept in market losses before letting up on the saber rattling. Talks will resume in Washington today… let’s hope rationality prevails.
2) The bar just got a bit higher for China. China has been in a pitch battle with its economy, aggressively trying to keep growth on track. The trade war with the US was certainly a factor but the Chinese economy was already facing headwinds prior as the country had begun to deleverage after a period of government-loan-inspired growth. You may recall images of gleaming new empty buildings springing up and massive roadways leading to nowhere. With the US being China’s largest trade partner enacting sanctions, there is little that bankers could do to avoid some pain. In recent month’s the Chinese economy has shown some positive, albeit small, signs that things might be turning around and a positive outcome to trade negotiations with the US would certainly cement the turn-around. Last night, WHILE YOU SLEPT, an economic release in China showed a decline in exports by -2.7% when expectations were for a +3% increase. Asian shares fell overnight… the bar is higher.
Stocks were hard hit in yesterday’s session with what appeared to be little in the way of support. Stocks ultimately closed off their lows with a late-session attempt at dip buying, but much of the damage had already been done. Yesterday’s move was the biggest pullback for the Dow Jones Industrial average since January 3rd though markets are still well above the lows for the year. Yesterday’s selling saw sectors affected by Chinese trade hit hardest with industrials and technology both falling around -2%. The S&P500 fell by -1.65%, the Dow Jones Industrial Average sunk by -1.79%, the Russell 2000 sold off by -2.02%, and the NASDAQ 100 slipped by -1.98%. The VIX index, which is used as a gauge of investor fear, rose for a second straight day closing at 19.32 which is the highest close since late January. Bonds advanced yesterday with 10 year treasury yields falling by -1 basis point to 2.45%. Crude Oil, which is affected by international trade, fell by -1.37%, almost closing below its 200 day simple moving average.
WHAT TO LOOK FOR TODAY:
The Department of Energy will release its weekly Crude Oil Inventory number and it is expected to show an increase of +1.9 million barrels compared to last week’s +9.9 million barrel increase, representing a slowdown in production. This morning’s pre-bell earnings include 20th Century Fox, McKesson, Chesapeake Energy, Bunge, and Marathon Petroleum. After the bell, we will hear from Walt Disney, Roku, Etsy, and Energy Transfer Partners, amongst others. Fed Governor Lael Brainard will speak this morning and later today the Treasury will auction off $27 Billion 10-year notes.