Market Remains Shaken Over Tariff Threats Ahead Of U.S.-China Trade Talks

Trade worries remained a headwind for the market as investors and traders continued to mull the threat of increased U.S. tariffs on Chinese goods even as they awaited the outcome of trade talks this week between the world’s two largest economies.

The market appears to not have been able to maintain momentum from relief that helped U.S. stocks stage an impressive comeback on Monday. Equities initially sank sharply Monday after Trump over the weekend said via Twitter Inc TWTR that 10% duties on $200 billion on Chinese goods would increase to 25% on Friday. He added that $325 billion in Chinese goods that are untaxed would face a 25% tariff “shortly.” 

After the market closed yesterday, U.S. Trade Representative Robert Lighthizer reiterated that the 10%-to-25% hike would take place on Friday. Still, a delegation from China is scheduled to continue trade talks in the U.S. later this week.

A protracted trade war could further disrupt the U.S. and Chinese economies and have knock-on effects throughout other parts of the world. Wall Street had be expecting a deal to get done soon. After multiple indications from the administration that trade talks were going well, the market was surprised by the developments and got skittish quickly. 

Market Makes a Comeback

But all three major indices rose fairly steadily throughout the day Monday, erasing much of the losses they had sustained amid the fresh trade war fears.

It’s possible that some market participants were buying on such a pronounced dip in a fit of bargain hunting. 

But it also seems likely that traders and investors may be thinking that Trump is using the threats as a bargaining tactic to try to pressure China into accepting a deal soon. After all, the president tends to make grandiose statements at first and then land somewhere more practical, even though it may take a while to get there.

In one of his tweets, Trump said, “The Trade Deal with China continues, but too slowly, as they attempt to renegotiate.”

Although Trump’s tweets cast doubt on scheduled talks between China and the U.S. this week, news reports said a trade delegation is still set to resume talks. That may have added to the market rebound Tuesday. 

Even though they pared substantial losses, the main three U.S. indices did end up shy of breaking even. 

Notably, the Russell 2000 Index (RUT) of U.S. small-cap stocks managed to make it into the green. That may be because U.S. small caps have less exposure to China than big multinationals, and they may not face as many headwinds if trade talks stumble.

Health Care, Energy Fare Relatively Well

Meanwhile, Health Care was the only S&P 500 sector that finished in positive territory. The gains came after Glenview Capital Management Chief Executive Larry Robbins made positive comments about the sector at a conference. And Centene Corp CNC shares were the sector’s biggest gainer after a Reuters report said two hedge funds have amassed holdings in the insurer and are considering a challenge to its planned acquisition of another company.

The news comes after the sector has been beaten up recently over worries about changes from Washington that could affect Health Care companies.

The Energy sector was another relatively strong performer on Monday, losing only 0.07%. Anadarko Petroleum Corporation APC led the way higher after Occidental Petroleum Corporation OXY included more cash in its rival bid for the company. 

Also, despite the prospect of a protracted trade war that could dampen global demand for oil, crude prices managed to close in positive territory, apparently adding support to the Energy sector. Crude prices gained ground yesterday amid rising tensions between the U.S. and Iran, but they were pointed lower early today.

U.S. sanctions on Iran and Venezuela have been supporting prices for some time, as have OPEC-led supply cuts. But tensions involving Iran have ratcheted up amid a deployment of a U.S. carrier strike group and bomber task force to the region.

Figure 1: Soybeans (/ZS - candlestick) have been under pressure from potential higher plantings as planting of corn (/ZC - purple line) has been hampered by rain. On Monday, the oilseed came under heavy selling pressure as the market was faced with a potentially longer trade war than had been anticipated. Historically, China has been a heavy buyer of soybeans. Data Source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Cool Beans: It wasn’t just stocks that took a hit Monday after Trump threatened to hike tariffs on Chinese goods. Soybean prices also fell, nearing their lowest point since 2008. Because China is the biggest importer of U.S. soybeans and has slapped tariffs on imports of the commodity from the United States, a trade deal that could lift those duties would increase demand for U.S. soybean exports. A prolonged trade war wouldn’t be good for demand, and unsold soybeans could continue piling up. But it’s not only trade-related issues that have been pressuring soybeans. As wet weather has hampered corn planting, soybeans have come under pressure as farmers may switch to planting more soybeans, further adding to supply. As soybeans can be planted later than corn, it remains to be seen whether that switch actually happens if China’s soybean tariffs remain in place.

Net Selling: Last month, TD Ameritrade clients were net sellers of stocks, favoring less-risky assets such as fixed income products over equities, the latest Investor Movement Index (IMX), released Monday, showed. The IMX is TD Ameritrade’s proprietary, behavior-based index, aggregating Main Street investor positions and activity to measure what investors actually were doing and how they were positioned in the markets. The selling reflected the broader theme in the market of tepid reaction to all-time highs in stocks, with TD Ameritrade clients being net sellers of Facebook.com Inc. FB, Amazon.com, Inc. AMZN, Bank of America Corp BAC, Citigroup Inc C, Twitter, and Alibaba Group Holding Ltd. BABA. It seems that the macro situation being influenced by tariff negotiations will continue to be an overhang for the market. However, when there isn’t fresh news, the path of least resistance for the market could be to the upside, while when news strikes, like it did Sunday, the sellers and volume quickly appear.

Consumer Credit: Later today, the market is scheduled to get a snapshot of the U.S. consumer credit situation in March. The report from the Federal Reserve shines a light on how much revolving credit (think credit cards) and non-revolving credit (think car loans) Americans have outstanding. Increasing consumer debt can be an indicator that people are more comfortable with the economy and their job prospects and can be a boon for consumer spending that works its way into personal consumption and retail sales reports. Consumer spending makes up the largest percentage contributor to GDP. According to data from February, revolving credit rose at a seasonally adjusted annual rate of 3.25% and non-revolving credit grew at a yearly rate of 5%.

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