Monday, May 13, 2019

Markets tumble on faltering US-China trade talks

Dow plunged 617, decliners over advancers 5-1 & NAZ sold off a big 269.  The MLP index fell 3 to the 249s & the REIT index was off only 1 to the 377s.  Junk bond funds were mixed & Treasuries rallied, taking the yield on the 10 year Treasury down 5 basis points to 2.4%.  Oil was sold in late day trading, taking it below 61, & gold shot up 13 to 1300 (more below).

AMJ (Alerian MLP Index tracking fund)

Pres Trump said the latest round of retaliatory tariffs announced by China put the US in a great position, & represent “a very positive step” in the ongoing trade negotiations.  China retaliated to Pres Trump's latest shot in the trade war.  Beijing said it would hike tariffs on $60B in US goods to as high as 25%.  “I love the position we’re in,” Trump said, adding, “There can be some retaliation, but it can’t be very substantial by comparison.”  Trump also confirmed that he plans to meet with Chinese Pres Xi Jinping & Russian Pres Vladimir Putin at the G-20 summit in Japan in late Jun.  “We have the right to do [tariffs on] another $325 billion at 25% in additional tariffs” on Chinese goods, Trump said, but added, “I have not made that decision yet.”  The retaliatory moves by the Chinese followed the administration's move Fri to hike duties on $200B in Chinese goods to 25% from 10%.  “We’re taking in tens of billions of dollars” in tariffs, Trump said in the White House.  He did not mention that the tariff $s are being paid by US consumers & not by China.  The economic conflict widened last week as the 2 sides struggled to strike a new trade agreement.  Trump decided to increase the tariffs following what the US called China’s decision to renege on key parts of a developing deal.  Equities market fell after the Chinese retaliated in response.  “We had a deal with China, it was 95% of the way there,” Trump said, “and then my representatives...they went to China, and they were told things [that were fully agreed to], we’re not gonna get anymore, they’re gonna unagree [sic] to them... we’re not gonna get anymore. And I said ‘good, that’s fine, put on the tariffs,’” Trump recounted.  China’s tariff increases, which raised the duties on thousands of products to 25% & 20% from either 10% or 5% previously, target key pieces of Trump's political base, including manufacturing & agriculture.  While the tariffs affect technology components & numerous other manufactured products, they also increase duties on goods such as wheat, peanuts, sugar & berries.  US farmers have suffered from price decreases caused in part by China’s tariffs & have grown increasingly unsettled by the escalating trade war.

Trump says he has not decided whether to put tariffs on remaining $32…

White House economic adviser Larry Kudlow acknowledged that the Chinese do not directly pay tariffs on goods coming into the US, contradicting Pres Trump's claims that China will pay for tariffs imposed by the US.  Kudlow said that “both sides will suffer on this,” but argued that China will suffer significant GDP losses as export markets are hit.  The blow to US GDP, on the other hand, won't be substantial since the economy is “in terrific shape,” he added.  Chris Wallace pressed Kudlow about Trump’s claims.  “It’s not China that pays tariffs,” Wallace said.  “It’s the American importers, the American companies that pay what, in effect, is a tax increase and oftentimes passes it on to U.S. consumers.”  “Fair enough,” Kudlow replied. “In fact, both sides will pay. Both sides will pay in these things.”  Kudlow added, however, that China doesn't actually pay the tariffs, but that their GDP will suffer “with respect to a diminishing export market.”  “This is a risk we should and can take without damaging our economy in any appreciable way,” Kudlow said.  The most recent round of trade talks, which ended on Fri with no final agreement, followed Trump’s decision to more than double tariffs on $200B of Chinese goods.  Trump said on Sat that China should “act now” to wrap up a trade deal with the US, warning that “far worse” terms would be offered to them in what he predicted would be his second term as pres.  Trump also suggested that the US was “collecting” big tariffs from China.  “Would be wise for them to act now, but love collecting BIG TARIFFS!” he tweeted.

Kudlow acknowledges US will pay for China tariffs, contradicting Trump

Boston Fed Pres Eric Rosengren tried to calm investor fears over the escalation in the US-China trade dispute, but acknowledged the longer it goes on, the more uncertain it becomes.  “The U.S. economy is strong enough to withstand the trade issue coming up now,” Rosengren said.  Rosengren said the Fed would take a wait-&-see approach to the dispute. How long the dispute lasts is key, he added, with uncertainty rising the longer the fight lasts.  “If it’s only for a few weeks, it is not going to have its much impact at all,” he said.  “If it starts to be a situation where we expect tariffs to be high for a long period of time, it does start to disrupt trade patterns,” he continued.  Last Fri, the US increased tariffs on $200B of Chinese goods to 25% from 10% & today, China retaliated by raising tariffs on $60B in imports.  Pres Trump has threatened to implement tariffs on more Chinese goods.  Rosengren said he didn’t agree with a recent a report that said there was a “real risk” of a recession occurring by the end of 2020.  ”My own expectation is that we will probably not have a recession,” Rosengren said.  While the economy would likely grow more slowly, fiscal & monetary policies are supporting activity, he said.  “The one uncertainty is trade,” he added.  Earlier today, Minneapolis Fed Pres Neel Kashkari also counseled calm in regards to US-China trade.  “Right now, I’m in a wait-and-see mode,” he said.  “There has been a lot of bluster on both sides about trade over the past couple of years. We haven’t seen much evidence that it is showing up in the aggregate economic statistics,” Kashkari said.  “I’m hopeful that cooler heads will prevail and this won’t go down a very nasty path,” he added.  Rosengren is a voting FOMC this year & Kashkari rotates onto the FOMC in 2020.

Fed’s Rosengren says economy can ‘withstand’ trade fight with China

Gold futures climbed above $1300 an ounce to post their highest finish in roughly a month, as US benchmark stock indices suffered steep declines with US-China trade talks at an apparent stalemate.  Gold for Jun delivery added $14.40 (1.1%) to settle at $1301 an ounce after earlier trading as low as $1282.  That was the first settlement above $1300 & highest most-active contract finish since Apr 10.  Last week, prices based on the most-active contract climbed 0.5%.  Gold futures had settled higher for a 2nd straight session on Fri as the Trump administration raised the import taxes on select Chinese goods from 10% to 25%.  The administration claimed its Chinese counterparts reneged on commitments made in earlier talks.  Stocks on Fri had dropped initially on the trade developments before staging a late-session recovery today's dealings, US stocks traded broadly lower after China said it would raise tariffs on $60B worth of US imports to as high as 25%.  The $, as measured by the ICE US Dollar Index traded little changed as gold futures settled.  Currency investors were increasingly favoring havens, including the Japanese ¥, over the $.  It is relative $ strength that has limited gold's advance, as a richer buck makes the metal less attractive to investors using other currencies & vice versa.

Gold tops $1,300 for highest finish in a month, as U.S. stock market drops on trade tensions

Stocks began the day with selling & it did not let up.  The Dow finished about 100 above the lows.  But bargain hunting was spotty & limited during the session.  The outlook for stocks is gloomy & will remain that way until there are prospects for improvement in trade talks.  And that may not be soon.

Dow Jones Industrials

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