The futures markets are well in the red this morning following a day of weak trading Tuesday. President Trump increased the tariffs on goods made in China to 104% at midnight last night in an escalation of the trade war between the two countries. China has responded by raising tariffs on U.S. goods to 84% starting Thursday. Overall, the markets are not responding well to these developments and are selling futures, suggesting a weak start to the trading day. A few companies, such as air carrier Delta (DAL), have pulled their forward guidance and are stating that weaker demand is occurring. Still, the broader market remains oversold on a technical basis. The minutes of the Federal Reserve’s March meeting will be released later this afternoon, giving insight into the lead bank’s interest rate decision-making process.
The stock market started positively yesterday, following several days of selling action, as traders took advantage of an oversold stock market. However, following a retaliatory increase in tariffs from China, President Trump stated that an additional 50% increase in the tariff rate would be placed on goods from China, causing all gains to erode, and the market quickly moved to the downside. Overall, the S&P 500 fell 79 points (down 1.57%) yesterday, the Dow Jones Industrial Average retreated 320 points (down 0.84%), and the NASDAQ was off 335 points (down 2.15%). Moreover, market breadth was rather negative, with decliners outpacing advancers by a 3.0-to-1.0 ratio. All eleven stock market sectors finished in the red, though materials equities were amongst the worst performers. Financial stocks were amongst the best performers, though only on a relative basis.
In commodity news, oil prices rapidly sank as traders priced in less demand for the fuel source, given higher economic uncertainty. Additionally, President Trump signed a few executive orders that should incentivize the construction of coal power plants, which could drive further energy production in the years ahead and hurt oil demand. Elsewhere, U.S. Treasury bond yields were largely higher as long run inflation concerns increase. Long-term rates rose more than those with shorter durations, as investors priced in more inflationary pressures from tariffs. A portion of the market believes these moves are related to China selling from its U.S. Treasury bond holdings. The Chicago Board Options Exchange Volatility Index, or VIX, commonly known as the fear index rose rapidly through the session yesterday, suggesting traders are rapidly purchasing options protection.
Several economic reports will be released in the days ahead. These include core- and non-core Consumer Price Index (CPI)for March on Thursday. On Friday, the core and non-core Producer Price Index (PPI), as well as the University of Michigan’s preliminary consumer sentiment Indicator for April are on the docket. Additionally, several regional Federal Reserve Presidents are slated to give remarks on the economy. These reports should provide insight into inflationary pressures and how the Federal Reserve could act concerning future interest rate policy. Elsewhere, earnings season is slated to kick off later this week, with several large financial institutions reporting quarterly results. This should give further insight into how well these companies are faring, given considerable economic uncertainty. - John E. Seibert III
At the time of this article’s writing, the author held positions in none of the companies mentioned.
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