The Market Today
Trade War Escalates Sending Global Markets Reeling
by Craig Dismuke, Dudley Carter
Trade War Remains Focus; July’s Service-Sector Reports Released: Today’s calendar will bring both the Markit (8:45 a.m. CT) and ISM (9:00 a.m.) non-manufacturing indices. The ISM index carries more weight with the U.S. markets and is expected to inch higher, but both reports have the potential to stir up the existing angst. As indicators of the part of the U.S. economy not directly hit by the trade uncertainty, any spillover of manufacturing weakness in the services sector would raise concerns. However, the focus will clearly be the ongoing escalation of the U.S.-China trade war.
Overnight – Markets Fret U.S.-China Trade Tensions Will Spiral: President Trump tweeted last Thursday that the U.S. would add a 10% tariff on $300B of Chinese goods next month (more below), evoking a pledge from China to retaliate and leading to two days of notable market volatility. That risk-off tone was revived in Monday’s global session, with China’s response sparking fears that trade tensions are spiraling into a full-blow trade war. State-owned Chinese companies have been instructed cut-off imports of U.S. agricultural products, a top priority on the White House’s agenda. Additionally, the People’s Bank of China set its daily target for the yuan at its weakest level since early December, sending market-based measures through a key 7-yuan-per-dollar level. A PBOC statement noting it will not use the yuan as a weapon in the trade war likely only added to the vexation in the Oval Office. The offshore yuan tumbled 1.5% to 7.08, the sharpest move lower since August 2015. The previous episode sparked a market meltdown that punished global equities. China’s CSI 300 slumped 1.9% amidst escalating tensions and data showing its services economy expanded at the slowest pace in five months. With all 12 sectors in the red, the Stoxx Europe 600 was trading down 1.9% at a two-month low. U.S. equity futures were off more than 1.2% before 7 a.m. CT and Treasury yields had added notably to last week’s losses. After dropping 14 bps last week, the 2-year yield slid 9.6 bps overnight to 1.615%, the lowest since November 2017. Fed Funds Futures sharply repriced to place a 27% wager that the Fed drops the Fed Funds rate by 0.50% in September to increase the insurance policy they took out last week to cushion the U.S. economy. Following last week’s 22.5-bp slide, the 10-year yield tumbled another 7.4 bps to 1.767, a new low back to October 2016.
ICYMI – August 2, 2019 Weekly Market Recap: A tight week broke loose after Wednesday’s Fed decision, and crescendoed as President Trump threatened the remaining balance of unaffected Chinese imports with a 10% tariff. Early-week data showed core inflation firmed more than expected and consumer confidence surged back in July. All was forgotten, however, after a well-telegraphed rate cut was followed by a seemingly-thrown-together-and-unrehearsed press conference. The Fed cut rates for the first time since 2008 as insurance for the economy against global weakness and trade tensions, and to support inflation. Two dissents showed some division on the Committee, which said they’ll “contemplate” in coming weeks what to do in September. However, all seemed well-received until Chair Powell caused violent market swings, calling the cut a “mid-cycle adjustment” (hawkish) before clarifying he “didn’t say just one” (dovish). Following a flimsy defense of their formula for easing to offset broad uncertainties, he said they’d be watching trade developments, among other things, as they decide what may come next. With that in mind, Treasury yields plunged the next day after President Trump said the U.S. would add a 10% tariff on $300B of Chinese goods starting in September. Expecting the escalation could meet the Fed’s hurdle for more easing, markets ended pricing in at least two more cuts by the end of the year. After an exhausting two days, markets showed little response to Friday’s ho-hum payroll report. Click here to view the full recap.