Raise your weapon. It was a stormy day on Wall Street outside and inside the exchange as shares plunged in response to a Chinese tariff counterstrike. Investors’ optimism from Friday quickly vanished as China imposed a 25% tariff on $60 Billion in US exports and optimism turned to panic.
WHAT YOU NEED TO KNOW:
1) Things may look ugly but the President is optimistic. At least that is what he said… tweeted. WHILE YOU SLEPT, the President decided to give the market something to be happy about and announced that he will meet Chinese President Xi at the G-20 summit next month. He also said that he felt that talks would be “very successful”. At the same time, the Administration revealed a list of $300 Billion in Chinese exports which will be taxed 25% in the next salvo. China was also warned against making any “substantial” retaliation. Say one thing and do another seems to be the theme here and futures traders seem to be latching on to what was said, trading stocks up overnight.
2) Bitcoin is back in business. Bitcoin has been silently climbing, first trading back over $5000 in April and then jumping over $7000 for the first time since last summer as trade tensions heated up last week. The most likely cause is Chinese currency traders selling the Yuan and buying the crypto currency. Don’t believe it? Check out chart 14 in my attached daily chartbook which shows the Dollar / Yuan exchange rate shoot up last week as Trump announced the tariff increase. This jump means that the Yuan is weakening. Now turn to chart 15 in the chartbook and look at the rise in bitcoin that occurred over the same period. The moves look almost identical. With the likelihood increasing that China will move to devalue the Yuan in order to make their goods cheaper to other currencies, traders are looking for safety.
Stocks plunged yesterday as the trade tiff got real with China counter-taxing $60 Billion is US exports. Sectors affected by trade were particularly hard-hit while safe sectors such as Utilities, Staples, and Real estate held their own. The Technology sector was hardest hit with Semiconductors leading the selloff. Apple lost -5.81% on trade fears and a Supreme Court ruling against them, which accentuated losses in the tech heavy NASDAQ and large cap S&P. Stocks closed off their session lows but still deep in the red making it the worst start to May in almost 50 years. The S&P500 fell by -2.41%, the Dow Jones Industrial Average traded off by -2.38%, the Russell 2000 dropped by -3.18%, and the NASDAQ 100 plummeted by -3.46%. Funds flowed into safe haven assets as Gold climbed by +1.08% to $1291 along with the Gold Miners Index which climbed by +2.57%. Funds also flowed into US treasury bonds. Ten-year treasury yield fell by -6 basis points to 2.40%. Even more impressive was the two-year treasury yield which fell by -8 basis points, a rare move in short maturities. The 3-month / 10-year yield curve closed inverted for the first time since March as a result of the move in ten-year yields.
WHAT TO LOOK FOR TODAY:
We have no economic data scheduled for release today but we will hear from Fed speakers Williams, George, and Daly spread out through the session. It will be a quiet day for earnings with Ralph Lauren and WageWorks reporting before the bell and Agilent reporting after the close, amongst others. The lack of numbers will provide traders another day to process the reality and potential fallout from this latest trade skirmish. Hopefully the optimists will prevail today.