Published May 24, 2019
Stocks have spent a third consecutive week wrestling with the implications of a longer trade standoff with China. The excerpt below from Schwab’s research team outlines some of the reasons why the market has reacted badly to the recent seeming deterioration in trade talks.
The market’s focus shifted over the past three weeks as stock markets around the world pivoted from a view that a deal between the United States and China was imminent to concerns about the deal falling apart. Enflaming trade tensions is consistent with President Trump’s negotiating style; perhaps to deflect criticism that the deal may be too weak and/or to extract a few last-minute concessions from China. Yet, there is more risk to investors for a deal falling through now than there was a few months ago. First quarter economic growth in both the United States and China exceeded expectations and may have emboldened both sides to hold out on key concessions. Also, the talks have been challenged by efforts to create enforcement mechanisms, since China wants an immediate lifting of all tariffs rather than only after a period of good faith, according to The Wall Street Journal.
While a delay is possible, accompanied by a tariff increase from 10% to 25% on $200 billion of Chinese goods, it is still possible that talks will resume and a trade agreement is ready for a signing ceremony at the G20 summit in Japan on June 28. China has already publicly agreed to many U.S. priorities for a trade deal; including prohibitions on currency manipulation, allowing broader market access by foreign companies, implementing tougher protection of intellectual property rights and seeking more balanced trade. Many of these were outlined in a major speech by President Xi in April, as reported by Reuters.
A failure or lengthy delay to a trade deal would come at a bad time for the global economy. Global manufacturing activity is in the longest slump in the more than 20-year history of the global purchasing managers’ index (PMI), as you can see in the chart below.
China would be especially affected, as softer global demand has weighed on exports, which contracted 2.7% in April from a year ago (Reuters); even though officials seemed to be closing in on a trade deal. Growth of Chinese exports to the United States fell to -13.1% and to Japan to -16.3%, while they slowed down to +6.5% for China’s biggest customer, the European Union (EU). All areas are coming in below the average of recent years.
In sum, the trade negotiations appear critical to staving off worsening global economic conditions, which might be enough to tip the U.S. into recession. That fear has been increasingly influencing stock prices.
Stocks posted a third straight weekly loss as trade tensions with China ratcheted up. A near ban on doing business with Chinese smartphone provider Huawei pressured semiconductor stocks Monday, with the group falling -4%. The broad market slumped -0.7%. A 90-day grace period on the ban gave investors a reprieve Tuesday leading stocks to a +0.9% rebound. But the good feeling didn’t last. A -0.3% dip Wednesday was underscored by a near -1% slide in smallcap stocks as oil prices sold off. Oil prices accelerated their slide Thursday with a -6% tumble leading investors to seek safer choices. The 10-year Treasury yield, which falls as buyers purchase bonds, slid to 2.3%, having now completely reversed its 2018 rise in its entirety. The broad market S&P 500 was down -1.2% while smallcaps fell -2%. The Trump Administration tried to appease investors Friday with hopeful words on a China trade deal. However, investors appeared skeptical, selling into early market strength to close the session with a -1.17% move.
Stocks fell for the weekly but largely held their key support levels. The S&P 500 (SPY) held at 2800 again but left the week -1.07% lower. The Nasdaq 100 (QQQ) slid -2.67%. Smallcap stocks (IWM) barely held at key support, but still lost -1.34% for the week.
Warm wishes and until next week.