Trade Stew: Simmering U.S.-China Tensions Keep Market On Edge

It appears that worries about global economic growth remain high as the U.S.-China trade dispute continues. Protests in the major financial center of Hong Kong also seem to be adding to the jitters as Hong Kong International Airport canceled departures.

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Key Takeaways

  • Hong Kong protests add to investor worry

  • Treasury yields come under pressure amid safe-having buying

  • Gold rises as investors move out of equities

(Monday Market Open) After last week’s volatility, some investors may be hoping for smooth sailing this week. But it appears that worries about global economic growth remain high as the U.S.-China trade dispute continues. Protests in the major financial center of Hong Kong also seem to be adding to the jitters as Hong Kong International Airport canceled departures. 

Amid the anxiety, which has pushed the Cboe Volatility Index (VIX) toward 20 again, investors were dumping riskier assets like stocks and oil and moving into the relative safety of U.S. government debt and gold. With the yield on the 10-year Treasury below 1.7%, today might not be a great day for the Financials sector.

It’s possible that today’s trading may be driven by geopolitical headlines because there isn’t much in the way of economic data scheduled for release. While we’ll have to see how stocks shake, it might be a good time to remind yourself that, while short-term traders may love volatility and it can be scary for the rest of us, over the long term, blips like last week tend to smooth out. However, consider that past performance doesn’t guarantee future results.

Tariffs, Currency, and the Market

But a resolution doesn’t seem likely any time soon, as both China and the U.S. apparently are digging in their heels. Escalating tensions last week included amove by China’s central bank to weaken the yuan versus the dollar, the U.S. designating the Asian nation a currency manipulator, and Trump saying trade talks between the two nations could be canceled and that he isn’t ready to make a deal.

Each of the three main U.S. indices finished lower on Friday, capping a volatile week where the VIX moved above 24 before pulling back. 

In corporate news, Uber (UBER) also helped weigh on the market. Its shares fell 6.8% after the ride-hailing company reported a larger-than-expected loss and revenue that fell short of third-party estimates. That was a contrast to competitor Lyft’s (LYFT) results from earlier in the week as the company reported a narrower-than-expected loss and higher revenue than third-party estimates had projected.

Tech, Energy Lead the Way Lower

On Friday, the Information Technology and Energy sectors led the way lower, with both sectors falling 1.25%.

Chipmakers, many of which derive a good portion of their revenue from China, contributed to pressure on the tech sector, with the PHLX Semiconductor Index (SOX) dropping by more than 1.8%.

Energy stocks slumped despite a gain in oil prices that came after data showed European inventories dropped and amid expectations of further OPEC production cuts. It could be that Energy stock investors were focusing instead on news that the International Energy Agency reported slow global demand growth and expectations that the escalating trade war will continue to pressure demand. 

The economic data flow this week is relatively heavy. Economic reports include releases on July consumer prices on Tuesday, July retail sales on Thursday, and housing starts and building permits on Friday. 

On the earnings front, Macy’s (M), Cisco (CSCO), Nvidia (NVDA), and Deere (DE) report this week.

It could be interesting if DE management offer any outlook on the U.S.-China trade situation given that U.S. farmers have been at ground zero of the ongoing trade battle. And Alibaba (BABA) and Walmart (WMT), which both also report this week, could give us an expanded picture of the tariff situation. Also consider paying close attention to see if NVDA executives offer any insight into the trade situation from its perspective. 

FIGURE 1: CHOPPY VIX. Last week saw the Cboe Volatility Index (VIX) jump above 24 before easing back all the way to the 17 handle. But Monday morning sees the fear gauge marching again toward 20. For perspective, it may be worth keeping in mind that the gauge’s long-term average is around 18 (red line). Data source: Cboe Global Markets. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.  

Tax Cut Impact Seen Threatened:Last year, many companies saw their stocks rally thanks to a large corporate tax cut. It was one of the many things helping earnings rise more than 20% per quarter for a stretch. This year’s benefits from tax cuts, however, could be canceled out by the threatened rise in tariffs to 10% on an additional $300 billion of Chinese goods expected to go into effect next month. That $30 billion would bring the total impact from tariffs this year to $138 billion—more than the $122 billion of additional benefits from the tax cuts, Barron’s reported, citing research from Strategas Research Partners. Meanwhile, U.S. companies and business owners exporting products to China were feeling the heat even before the latest threats from the White House, as exports to China fell 16.8% year-over-year in June.

Producer Inflation Muted: The economic calendar last week was pretty light. And it’s probably just as well given that investors had plenty of other things to think about during the roller-coaster week. One interesting report that didn’t seem to make many waves but that is important nonetheless was the producer price index (PPI), released by the government on Friday. The headline number came in at 0.2% for July, in line with a Briefing.com consensus. Meanwhile, the core index decreased by 0.1% when a 0.2% gain had been expected. Muted inflation could end up giving the Fed more room to lower rates again this year.

Consumer Inflation Data on Tap: Investors are scheduled to get more inflation data tomorrow, and many will likely be paying close attention given what it could mean for the magnitude of an expected rate cut. Consumer price index data for July is expected to show a headline 0.3% gain and a core rise of 0.2%. Both figures rose more than Briefing.com consensus expectations last month. If that happens again, it would be a counterpoint to the muted producer price data. On the other hand, while most investors are expecting a 25-basis-point rate cut, based on the futures market, if consumer prices come in lower than expected, some could shift their positions toward expecting a 50-basis-point cut. Only time will tell. 

Good Trading,

JJ

@TDAJJKinahan

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This week's economic calendar. Source: Briefing.com
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Key Takeaways

  • Hong Kong protests add to investor worry

  • Treasury yields come under pressure amid safe-having buying

  • Gold rises as investors move out of equities

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