TROUBLE WITH TRADE

The major stock market averages gapped down at the open after news that US-China trade talks are breaking down. The Dow is currently down 220 pts and the SPX is down .95%. Consumer discretionary, industrials, tech and materials sectors are all down more than 1%. The VIX Index spiked briefly to 19 before falling back to 16. WTI crude oil dipped slightly to $61.60/barrel. The US dollar strengthened and gold is modestly higher today. Bonds are trading higher (except for junk). The 10-year Treasury yield fell back to 2.48%.

Trade negotiations between the US and China have hit a wall regarding protection of intellectual property. According to Bloomberg, US Trade Representative Robert Lighthizer was under the impression that China was prepared to change its law forcing foreign companies doing business in China to reveal “proprietary technologies and other intellectual property.” This practice is called “forced technology transfer,” and the Trump Administration wants it stopped. However, last week the Chinese told Lighthizer’s team they would not agree to a trade deal that involves a change in their laws. He then briefed President Trump on the last minute reversal, resulting in some predictable Tweets. The president threatened to raise trade tariffs on $200bil in Chinese imported goods to 25%. This blowup comes as Chinese negotiators are scheduled to travel to Washington this week. But of course, the way forward is now more uncertain and media outlets around the world are wondering aloud whether the trip will happen. Wall Street firms are weighing in, and most of them do not believe this is a Trumpian negotiating tactic. Rather, the story can be taken at face value: hopes of a trade deal, which was a near certainty, have been temporarily derailed.

We can expect global stock markets to throw a mini tantrum. In the wake of President Trump’s Tweets, the Chinese Yuan depreciated, oil & stocks fell, and Treasury bonds rose in value. There will of course be a debate among investors regarding how much of 2019’s stock market rally was driven by the expectation of a trade deal. According to CNBC, “Much of the 17% gain in the S&P this year has been credited to optimism about trade talks and also an easy Federal Reserve.” So for the time being, stocks will probably trade with headlines.


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