Wednesday, April 4, 2018

Markets climb higher after early plunge

Dow rebounded, finishing up 230 (near the highs), advancers over decliners 2-1 & NAZ gained 100.  The MLP index was fractionally lower to 239 & the REIT index went up 2 to the 226s.  Junk bond funds hardly budged & Treasuries were little changed following higher prices in the AM.  Oil fluctuated in the 63s & gold was even at 1336.

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US equities stormed back from deep losses sparked by trade tensions as investors speculated the Trump administration won't enact the most protectionist proposals & risk derailing economic growth.  The S&P 500 erased a drop of 1.5% as representatives from China & the Trump administration left the door open for a negotiated solution to avoid tariff proposals that wouldn't take effect for months.  All along, bond & currency markets remained calm, with the $ little changed & Treasury yields holding near 2.78%.  Still, fear that the tensions could escalate at any time hit specific sectors after after China said it would levy 25% tariffs on some US imports.  The Volatility Index held near double its level for the past year.  Soybeans slumped & energy producers retreated.  Markets have been buffeted in recent weeks by everything from a volatility spike & a tech selloff to fears of an all-out trade war & developments today suggest there may be more turbulence to come.  Investors are having to weigh the growing protectionist rhetoric between the US & China against the chances of measures having a meaningful effect on the still-upbeat global growth picture.

U.S. Stocks Erase Losses

The Trump administration indicated it's willing to negotiate with China on escalating frictions between the world's 2 biggest economies, helping to ease fears among investors of a tit-for-tat trade conflict.  Commerce Sec Wilbur Ross said China’s response isn't expected to disrupt the US economy.  He added China's reaction “shouldn’t surprise anyone” & added the US isn't entering “World War III,” leaving the door open for a negotiated solution.  “Even shooting wars end with negotiations,” Ross said.  Earlier, China said it would levy an additional 25% levy on about $50B of US imports including soybeans, automobiles, chemicals & aircraft.  The move matched the scale of proposed US tariffs announced the previous day.  The US is allowing 60 days for public feedback & hasn't specified when the tariffs would take effect, leaving a window open for talks.  Stocks opened sharply lower, but recovered as investors speculated that the flurry of tariffs may not do much damage to the global economy.  Pres Trump also downplayed the prospect of a trade war, saying on Twitter that “we are not in a trade war with China, that war was lost many years ago by the foolish, or incompetent, people who represented the U.S.”  Trump later tweeted that “when you’re already $500 Billion DOWN, you can’t lose,” in a possible reference to America's trade deficit with China.  Figures from the Commerce Dept put last year's trade gap with the Asian nation at $337B.  The administration is urging China to lower tariffs on cars & open its market to US financial services as part of talks to resolve a rise in trade tensions, according to a leaker.  Investors are weighing the risks of a trade war, with the administration's latest offensive based on alleged infringements of intellectual property in China.  The US is targeting high-tech sectors that Beijing sees as the future for its economy.  In a statement following the US release of details on its China tariffs, Treasury Sec Steve Mnuchin said the administration “will continue to engage in discussions with China to address these issues of reciprocal trade.”

U.S. Leaves Door Open to Talks With China Amid Trade-War Fears

Federal Reserve officials warn an escalating trade dispute between the US & China is adding an unwelcome layer of uncertainty to an otherwise bright economic outlook, though it's premature to say what the fallout means for jobs, inflation or monetary policy.  “It increases the uncertainty around the forecast,” St. Louis Fed Pres James Bullard told reporters today.  “It does present some downside risk, but generally speaking it is too early to tell what the actual impact will be on the U.S. economy.”  Bullard, an outlier among Fed officials in wanting to keep interest rates on hold for the rest of this year, said investor anxiety may suppress Treasury yields, in turn limiting the Fed's ability to fulfill projections for another 2 rate increases this year, because further hikes might invert the yield curve.  “I would see more uncertainty keeping longer rates lower than they would otherwise be. Therefore that could feed back to policy and possibly keep short rates lower than they otherwise would be as well,” he said.  US central bankers raised rates a qtr point last month & penciled in 2 or 3 more increases this year on the basis of an outlook that saw solid US growth & further reductions in unemployment which, at 4.1% in Feb, is already at its lowest levels since 2000.  Fed Governor Lael Brainard, speaking before China announced its response to the US tariff list, said trade policy is “a material uncertainty” to the outlook.  “I think it’s very hard to say now, how that could evolve -- but it’s certainly something that I take into account, in thinking about risks.”  Researchers at the Dallas Fed said the metals tariffs would probably reduce US GDP by a qtr-percentage point over the long run in an analysis published today.  US metals producers would benefit, & companies that use those materials as production inputs -- such as machines & equipment manufacturers -- would take a hit.  “What is it going to mean longer term for U.S. exports?” said Minneapolis Fed chief Neel Kashkari, answering a trade-war question at an event yesterday.  “We’re certainly going to have to avoid a trade war, but if it eventually ends up a way to open up markets, that could be a net positive over the long term.”

Fed Officials Warn That Tariff Brawl Clouds Interest-Rate Path

The CFOs of North America's largest & most influential companies are optimistic about the state of the world economy following the latest US tax and spending bills, according to a new survey of Q1 sentiment.  According to Deloitte's quarterly CFO Signals Survey, which tracks the thinking & actions of these CFOs, 90% rated the current conditions as good, a new survey high.  This compares to 74% in Q4.  The survey also found that 59% expect better conditions in a year.  Meanwhile, as interest rates have increased, their perception of financing is decreasing.  72% of CFOs say debt financing is attractive, down from 85%, & the attractiveness of equity financing decreased for public company CFOs to 43% from 46%, & for private company CFOs to 35% from 47%.  76% of CFOs now say US equities are overvalued, but that is down from last qtr's survey high of 84%.  The CFOs said their biggest concerns are securing the talent they need & politics & policy, particularly trade policy.  When asked about how the US tax law changes will impact their companies, they said they expect tax reform will increase their domestic investment, hiring & wages, & many also expect accelerated earnings repatriation, the transfer of offshore profits being returned to corps' home country.  When it comes to what to do with their repatriated cash, the more extensive use will be for debt repayment, share buybacks & divs, while many will use some of this cash for hiring & pay hikes.

This is how CFOs feel about the economy

Pres Trump's chief economic adviser Larry Kudlow blamed China's unfair practices for inciting intl fears of an impending trade war between the world's top 2 economies, dismissing concerns the White House's imposition of tariffs worth $50B  on Chinese goods was the catalyst.  “Blame China, not President Trump,” Kudlow said.  “Because they’ve been going on for many years. Trump is really the first president to fight back.”  Beijing imposed retaliatory, tit-for-tat tariffs on 106 American imports overnight, including soybeans, automobiles & chemical products in response to Trump's plans to place tariffs worth at least $50B on Chinese goods.  Although stocks fell almost instantaneously – the Dow tumbled about 300 points (1.2% after the opening bell) & both the S&P 500 7 NAZ declined by 1.2% – Kudlow warned investors to not overreact.  Already, there are back-channel talks between the US & China regarding the tariffs, with “unusually good” relationships between the 2 countries.  It could also take several months for any concrete action to be taken on the tariff proposals, Kudlow said.  But Kudlow, a self-described Reagan supply-side economist who favors free trade, also hinted at a possibility of no tariffs at all.  Trump, he said, supports free trade & wants to solve unfair trade balances “with the least amount of pain.”  “Trump is putting his cards on the table, he’s standing up for this country,” he added.  “But he’s also standing up for better world trade. President Trump regards himself as a free trader. I do too. But the path to free trade, real free trade, must include tremendous reforms and stopping these illegal and unfair trade practices.”

Blame China for unfair trade, not Trump: Larry Kudlow

As the trade conflict between the world's 2 largest economies escalates & China & the US fire at one another with sharp import tariffs, some have raised fears of another powerful tool of Chinese retaliation: its American debt holdings.  But China's gov is not considering reducing its Treasury bond holdings anytime soon, Vice Finance Minister Zhu Guangyao said.  "China is a responsible international investor," Zhu said, making reference to Chinese Premier Li Keqiang, who said during the country's latest Monetary Policy Committee meeting that reducing US Treasury holdings was not on the table.  "What the premier said is our policy."  China is the largest foreign holder of US debt, which is rapidly mounting amid massive gov stimulus programs.  Beijing holds $1.17T in Treasury bonds, helping to finance the growing budget deficit.  If it were to halt its bond purchases, gov interest rates could potentially skyrocket, as well as force borrowing rates up for consumers & companies.  But the vice finance minister's words would appear to put that speculation to rest.  "Both in domestic and international law, China is a responsible investor," Zhu said.  "So that's what Premier Li Keqiang said, the real policy of (the) Chinese government to the U.S. Treasury investment."  China announced sweeping tariffs today on 106 different American products amounting to $50B annually.  These include levies of 25% on major US exports like whiskey, soybeans & automobiles.  The move came less than 24 hours after Pres Trump unveiled a list of Chinese imports that his administration aims to target as part of a crackdown on what the pres deems unfair trade practices.  These retaliatory strikes are just the latest in an intensifying tit-for-tat campaign first sparked by the administration's decision to implement large tariffs on all steel & aluminum imports in early Mar.  Markets have reacted badly to the news, with fears of a full-blown trade war sending all major US indices back into correction mode, down 10% from recent highs — with all 30 Dow stocks & all 11 S&P groups lower.  Speculation over the Chinese-owned debt has abounded thanks to mixed messages.  Last night, Chinese ambassador to the US Cui Tiankai responded to a question on Treasury bond purchases simply by saying that, "If the other side makes a wrong choice, we have no alternative but to fight back."

China's vice finance minister dismisses talk of selling US Treasurys in response to tariffs

This was another one of those wild & woolly days for stocks.  The day began with the Dow down more than 400 & then finishing up over 200.  Buyers kept buying all day.  There is no way to make sense of these volatile moves.  More substantial swings are ahead.  This is new territory on the tariff front.  Tech companies that have been the darling of many investors are being viewed with more critical eyes.  Then there is the Fed.  Wild stock market behavior could influence those guys.  The bulls are happy that the Dow held above 24K.  Now they have the challenge of extending that enthusiasm tomorrow & beyond.

Dow Jones Industrials

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