In a surprise move, Trump threatens to increase tariffs on certain Chinese goods. That has sent global markets reeling.
Trade worries, which had been simmering, have returned to a boil after President Donald Trump surprised the market with a threat to increase tariffs on goods from China.
U. S. shares appeared poised to open sharply lower following a rout in Asian stocks after Trump said in tweets Sunday that 10% duties on $200 billion on Chinese goods would increase to 25% on Friday. He added that $325 billion in Chinese goods that are untaxed would face a 25% tariff “shortly.”
The tweets mark a sharp escalation in trade tensions between the world’s two largest economies just when Wall Street’s nerves about the dispute seemed to be relatively calm. In fact, part of the reason stocks have hit all-time highs recently has been because of optimism that a deal would get done soon.
But that worry reared its head again Monday, sending investors and traders concerned about the global economic fallout from an intensified trade war out of stocks and into so-called safe-haven assets.
Wall Street’s main fear gauge, the Cboe Volatility Index, shot up nearly 40%, trading near 18 Monday morning after hitting its highest point since January. With nerves on edge, investors and traders flocked to assets perceived as safer, boosting the dollar and sending Treasury yields lower.
Meanwhile, stocks that have significant exposure to China were among the hardest hit. Caterpillar was down more than 3% while Boeing was off more than 2.6%. Both Dow Jones Industrial Average components derive a good portion of their revenue from the Asian nation. Chipmakers including Advanced Micro Devices and Nvidia were also lower, as was Chinese online retail giant Alibaba.
As the market has been lured into relative calmness about the trade war given the optimism about a potential deal, it may have been easy to forget that trade issues between the United States and China have remained the biggest overhang to stocks.
There may be a lot of noise on this front, but investors can still keep their wits about them and perhaps let the first bit of the day’s trading play out to see how things settle in. Also, it may be worth keeping in mind that Trump has a history of grandiose statements followed by something more practical.
Further, the market has had a nice run, and some pullback might have been expected. Although it’s tough to put an exact percentage on that, it probably wouldn’t have been this large this fast.
Friday’s trade was dominated by strong economic data out of the United States. U. S. jobs growth surged in April, with 263,000 new positions created. Analysts had been expecting jobs growth of closer to 200,000. As job growth accelerated, the unemployment rate dropped to a near 50-year low of 3.6%.
Meanwhile, wages rose 3.2% year-over-year in April, the same as the previous month. Some investors came into the report worried that sharp wage gains might put more pressure on the Fed to tighten rates, but this data doesn’t show a big upsurge from previous months.
Consumer discretionary shares turned in the best performance of the S&P 500 Index’s 11 sectors, rising 1.4%. Presumably, some of that help came from the jobs report, which showed that wages have now grown 3% or more year-over-year for nine straight months. That may be a sign that workers are finally seeing some solid and reliable gains, which could help strengthen consumer demand. Consumer spending is the largest contributor to U. S. gross domestic product.
Friday’s jobs report seems to offer optimism that people will be shopping for things they want (consumer discretionary), not just things they need (consumer staples). Consumer discretionary stocks are generally cyclical, meaning they tend to do better when the economy is performing more strongly.
The Consumer Discretionary sector also got a boost Friday as Amazon gained more than 3% after Warren Buffett said in an interview with CNBC that Berkshire Hathaway has been buying shares of the online retailing giant.
Compared to last week, this week is fairly light on economic data. Still, investors are likely to pay attention to data on producer and consumer prices. It could be interesting to see what these data tell us about inflation, especially after the jobs report on Friday showed inflationary pressures in the form of wages were relatively subdued. (See more below.)
On the corporate earnings calendar, Disney is scheduled to report this week. Avengers: Endgame has now grossed more than $2 billion globally. Although this week’s quarterly results won’t include Endgame sales, it could be interesting to see whether management will discuss the blowout sales in their outlook for the current quarter.
As of Friday, Refinitiv data showed that three-fourths of the 400 S&P 500 companies that have reported this earnings season so far have beaten earnings expectations, Reuters reported, saying the better-than-forecast reports now have analysts expecting a nearly 1% gain in earnings for the quarter compared with a 2% decline that had been expected at the beginning of last month.
True, this earnings season started off with very low expectations, so beating those might not have been too hard. But the optimism that has seeped into the market has helped boost stocks to record highs as it has essentially been icing on a two-layered cake of support from a dovish Fed and optimism about progress on the U. S.-China trade front.
However, that last bit of the cake seemed to be crumbling Monday morning after Trump’s tweets.
