After The Close
The U.S. equity markets opened today’s session down sharply, but things improved modestly as the day wore on.
The continued slide in stocks was largely attributed to escalating trade tensions between the U.S. and China. Over the weekend, China declared a new round of tariffs on U.S. goods in response to the 25% duties on $50 billion of Chinese merchandise announced by the Trump administration last Friday. Today, the President fired back with the threat of 10% levies on another $200 billion of Chinese products, which, in turn prompted a threat of further retribution.
Meanwhile, although investors were largely too distracted to notice, the Commerce Department issued a strong report on the U.S. housing market for May. Housing starts jumping a greater-than-expected 20.3% versus last year, to an annualized rate of 1.35 million units, the highest since July of 2007. Meanwhile, building permits were up 8%, to a 1.3 million pace. However, this was a 4.6% drop from April.
At the closing bell, the Dow Jones Industrial Average was down 287 points, or 1.2%, marking its sixth-consecutive day in the loss column. Meanwhile the broader S&P 500 and the tech-heavy NASDAQ fared a bit better, each paring their losses to about a third of a percentage point by the end of the session.
As tariffs continued to be piled upon tariffs in tit-for-tat fashion, investors remained caught in the middle looking for a safe place to hide. Most of the 10 major market sectors were in the red, with the biggest hits sustained by basic materials (down 2.0%) and industrials (-1.6%). Unsurprisingly, consumer noncyclical, telecom, and utility shares, which are among the least likely to be impacted by a trade war between the two super powers, bucked the trend, with the last of the three tacking on more than three quarters of a percentage point on the session. Elsewhere, oil prices edged down ahead of OPEC’s meeting in Vienna on Friday, with light sweet crude trading 1.1% lower at about $65.10 a barrel.
Lastly, the European bourses also spent the day in the red. Germany’s DAX and France’s CAC-40 were each down a little over 1%, while the U.K. FTSE 100 got away with a more modest loss.
– Mario Ferro
At the time of this article's writing, the author did not have positions in any of the companies mentioned.
Before The Bell
The major U.S. equity indexes started the new week where they left off the last five-day stretch: with the bears holding the upper hand. The primary culprit was fears about deteriorating trade relations between the United States and China. Specifically, over the last weekend, China issued retaliatory tariffs to the latest batch of tariffs against China announced by the Trump Administration on Friday. The tariffs would not be effective until July 6th, but the continued bickering among the world’s two largest economies has brought concerns about what impact the trade wars would have on the global economy. The Dow Jones Industrials were down for the fifth-consecutive sessions, as it is comprised of mostly multinational companies that would be hurt by trade wars. Still, like Friday, the early losses were pared considerably by the closing bell, and there was some underlying positive signs, with advancing issues leading decliners on both the New York Stock Exchange and the NASDAQ.
For the day, the large-cap dominated Dow 30 and broader S&P 500 Index were down 103 and six points, respectively, while the NASDAQ, after a sharp early selloff climbed back to the neutral line, and the small-cap Russell 2000 again finished to the upside. Monday’s trading session continued the theme of recent weeks, which is notable sector rotation out of the multinational names and into the more domestic-dominated small-cap companies, which are less likely to be hurt by trade wars. From a sector perspective, the biggest laggards were the consumer staples and telecommunications groups, while the energy and technology categories rebounded from Friday’s setbacks.
On a day that was quiet on both the U.S. economic and earnings fronts, the investment community, as noted, was focused on the escalating trade war between China and the United States. This morning, though, as we just received an important report on the U.S. housing market. Specifically, the Commerce Department released housing starts and building permits data for the month of May. The strong report showed that privately-owned housing units authorized by building permits in May came in at a seasonally adjusted annual rate of 1,301,000, which was 4.6% below the revised April rate of 1,364,000, but is 8.0% above the May 2017. Even more encouraging, privately-owned housing starts in May were at a seasonally adjusted annual rate of 1,350,000. This was 5.0% above the revised April estimate of 1,286,000 and up 20.3% year over year.
Still, the main focus of the investment community today again appears to be the fighting between the United States and China. The new day has brought a sharp response from President Trump to China’s trade tariffs. President Trump threatened that his Administration would impose a 10% tariff on $200 billion of China-made goods if China refuses to change its trade practices. The latest missive brought another sharp response of possible retaliatory measures from Beijing. The rapidly escalating trade conflict between the world's two biggest economies is rattling the world’s equity, bond, and currency markets.
Meantime, one thing that bears watching over the coming months is a yield curve that is moving closer to flat lining, with the spread between 2- and 10-year notes narrowing quickly. Why is this noteworthy? Because the closer the yield curve gets to the flat line, the possibility of an inverted yield curve grows, which many pundits think could be a sign of a recession ahead. Our sense is the next few months will be closely monitored by the Federal Reserve to try to avoid an inverted yield curve situation, which is typically not viewed positively by the investment community. That said, the U.S. economy, as reflected in the housing data noted above, looks to be strengthening and a recession does not appear to be in the near- to intermediate-term picture.
With less than a half hour to go before the commencement of trading stateside, the equity futures are indicating a sharp lower opening for the U.S. stock market. Overseas, the main indexes in Asia fell overnight, with stocks in Shanghai plunging to two-year low. The situation is not much better on the Continent, with the major European bourses all down more than 1% as trading moves into the second half of the session. The U.S./China trade war is clearly unnerving investors around the world. In addition to the global equity selling, both the U.S. dollar and China’s yuan are weak. On the homeland, some more sector rotation out of the big names and into the small-cap stocks appears to be in store again, as the Russell 2000 futures are in positive territory this morning. Stay tuned.
— William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
