The Market Today
Trade Disputes Continue to Grip Markets
by Craig Dismuke, Dudley Carter
Existing Home Sales and the Triumvirate of Central Bank Chiefs: ECB President Draghi, BOJ Governor Kuroda, and Fed Chair Powell are all scheduled to speak from Portugal this morning at 8:30 a.m. CT. Given the importance of global central bank policies on sovereign debt yields, analysts will be paying close attention. At 9:00 a.m. CT, May’s Existing Home Sales report is expected to show a 1.1% MoM increase. Existing home sales have languished amidst higher rates, low inventory, declining affordability, and robust new housing market.
Mortgage applications for the week ending June 15 rose 5.1% on a 4.3% increase in purchase apps and an unusual 6.1% increase in refi apps. Regardless, refi apps on a 4-week moving average basis are at their lowest level since 2001.
Trade Disputes Continue to Grip Markets, Consumers in Crosshairs: The escalation of the trade disputes continues to grip markets (more below). Thus far, the impact on U.S. consumers should be minimal. However, if this continues, consumers could begin to feel the impact. According to the WSJ, “The first round of tariffs (the $50 billion finalized last week) will largely hit capital goods, such as industrial machinery, and intermediate goods, like semiconductor components. For the next round, it will be tough to avoid stuff like phones, clothes and TVs. Who pays? Chinese suppliers or U.S. retailers could absorb some of the cost, insulating consumers but hitting their own profits, or they could pass the cost on to consumers in the form of higher prices.” The Chart of the Day highlights the top U.S. imports from China.
Yesterday – Trade War Remained Markets Biggest Fear on Tuesday: U.S. stocks stumbled Tuesday as trade tensions between the U.S. and China kept sentiment suppressed for a second day this week. The Dow dropped 1.2% and closed down for a sixth consecutive session, its longest losing streak since an eight-day run in March 2017. Tuesday’s losses were just enough to push the blue-chip index back into negative territory for the year. The S&P 500 lost 0.5% while the Nasdaq moved down just over 0.3%. The S&P 500’s industrial sector, which is especially sensitive to the twists and turn on the trade front, moved lower for a sixth session and is down more than 4% over that span. Earlier, Chinese stocks sank 3.5% in one of their worst days in more than two years. U.S. Treasurys benefited, as higher prices across the curve pushed the 2-year yield down 0.4 bps to 2.56% and the 10-year yield 2.0 bps lower to 2.90%. The spread between the two flattened by 1.9 bps to 34.9 bps, a new low for the cycle. Other markets have also been affected by the pan-Pacific posturing on trade. While oil prices will be more heavily affected by OPEC news later this week, U.S. crude could be included in China’s retaliatory list. Oil prices dropped Tuesday and are down 2.7% since last Thursday. U.S. soybeans, also towards the top of the China’s list for possible tariffs, extended their recent precipitous decline and are now at their lowest level since September 2016.
Overnight – Stocks Bounce Back in Reprieve from Several Days of Trade-Related Turmoil: Wednesday’s overnight session has offered investors a bit of reprieve from the recent risk-off tone that was stirred up by a return of concerns around a trade war involving the U.S. and China. Japan led solid and broad-based gains across Asia and shares of Chinese companies recovered. However, China’s major index remain near bear market territory after falling close to 20% from their late January peaks. European stocks also improved overnight with the Stoxx Europe 600 higher by 0.6%. Making headlines this morning out of Europe was a proposal by German auto makers to do away with import tariffs on cars traded between the U.S. and EU. That proposal comes just two days before the EU’s response to U.S. tariffs on steel and aluminum are set to take effect. The EU response will add a 25% duty to $3.2 billion of roughly 200 separate U.S. good types imported into the EU, including Harleys and bourbon whiskey. Amid the pick-up in global activity, U.S. futures were stronger by 0.3% to 0.4% and the downward pressure on sovereign yields had eased. Core European yields were about flat and the entire Treasury curved had changed by less than 0.5 bps. Nonetheless, the spread between 2s and 10s has inched down for a third day to a new cycle low of 34.2 bps.