Big Stock Market Swoon On Increased Trade Tensions
It looks more likely that the September tariffs will go into effect as President Trump sent out a few hawkish tweets on trade. This sent the stock market plummeting on Friday, upstaging Powell’s Jackson Hole speech. The stock market almost made new a correction low after it looked like the correction was almost over.
A trade war makes trading much more difficult. The stock market is always a few tweets away from a correction. Specifically, the S&P 500 fell 2.59% which makes it about 7 points above its recent correction low. This decline makes it more likely that consumer sentiment will weaken and that the leading indicators will lose July’s gains.
Specifics Of Big Correction
Nasdaq fell 3% and Russell 2000 fell 3.09%. VIX was up 3.19 to 19.87 signaling the correction is back on. CNN fear and greed index never rose out of the fear category in the past few days. It fell deeper into extreme fear as it was down 7 points to 18.
Normally, this would be bullish, but it depends on how much stocks need to fall before Trump loosens his hawkish stance on trade. If the rhetoric ratchets up further, stocks can fall to new lows regardless of how oversold they are.
Once again, every sector moved in the same direction. Every sector fell. The worst 2 sectors were technology and energy which were down 3.3% and 3.37%. The tech sector hates trade tensions. Apple stock fell 4.62%.
As you can see from the chart below, there have only been 11 days this year where over 400 stocks in the S&P 500 moved in the same direction. However, there have been 6 such days in August alone which more than doubled the 2019 total. A pace of 6 per month is 72 for the year. 72 would be the most for a year since at least 1990. Bear market volatility and geopolitical issues cause such correlated action.
Trade Tensions Escalate Further
Trade tensions are escalating to a fever pitch. Because the September tariffs will be implemented in 7 days, it’s clear they will affect consumers. The more tensions escalate, the more likely they will hit a crescendo. Something must give or the economy will head towards a recession.
Neither country wants their economy to fall into a recession. The way a game of chicken works is both sides press as hard as they can until one side gives in so both don’t get hurt. It wouldn’t have made sense for the game to end with the first tariffs on steel and aluminum, but it will eventually end.
China announced on Friday that it will put an additional $75 billion worth of tariffs on soybeans, oil, and autos. The chart below breaks down the American goods hit with additional tariffs. Specifically, China is putting another 5% tax on American soybean and oil imports staring in September.
China will resume its 25% extra tax on American cars on December 15th. There is another 10% tax for some cars. With general duties included, the total tax on U.S. cars can get as high as 50%. It looks like President Trump will need to bailout soybean farmers again.
President Trump tweeted, “Starting on October 1st, the 250 BILLION DOLLARS of goods and products from China, currently being taxed at 25%, will be taxed at 30%... Additionally, the remaining 300 BILLION DOLLARS of goods and products from China, that was being taxed from September 1st at 10%, will now be taxed at 15%. Thank you for your attention to this matter!” Trump was clearly enraged by the latest Chinese tariffs.
China is trying to play out the clock until the 2020 election season. Trump will soon need to make a deal to help his election odds. Everything is coming to a climax as Trump needs a deal within the next few months. The extra 5% tariff on the already taxed goods shouldn’t be a huge deal, but the extra 5% tax on the goods taxed in September will make matters worse for consumers. So much for delaying some tariffs to make the impact more bearable.
This holiday shopping season might not be so great. I will be following the Redbook weekly same store sales report to see if there’s an impact. Greater the impact, the more likely something is done. If the consumer weakens, we will have a recession in America. The Chinese economy has been doing poorly recently. Its GDP growth will likely sink further.
Large Treasury Rally
After selling off for a couple days, treasuries rallied again because of the ‘risk off’ trade catalyzed by the trade war escalation. To be clear, there is no doubt this situation should be categorized as a trade war. It’s not a skirmish anymore. Most goods that can be taxed are being taxed and the rates are being raised.
10 year and 2 year yields fell 8 basis points to 1.54% and 1.53%. The Fed’s recent hawkishness has moved the futures market towards seeing an almost equally likely chance of 1 and 3 more cuts this year. It seems like whenever the Fed makes a big speech, trade war news comes out right afterwards calling into question what the Fed just said.
If the tariffs really hurt the economy in the fall, the Fed might cut rates further. The most likely path is 2 more cuts this year as the odds of that are 52.8%.
Conclusion
The trade war rhetoric got much worse on Friday. I wouldn’t say this is as bad as it can get, but I think we are about 80% there. Anything past 100% would involve some sort of military action which I deem highly unlikely.
The worse the trade war gets, the more likely a deal happens as one side will give in. President Trump can’t let this drag into 2020 because he is up for re-election. He needs a deal in the next few months which is why he is upping the ante now.