The Trade War Hijacks the Market… Again
Sick of all the trade war talk?
So is the stock market.
Futures are plunging deep into the red this morning following a sharp overnight sell-off in Asia. Tariffs are to blame, asserts the financial media, as Chinese officials claim they are ready to retaliate against U.S. trade threats.
“Markets are coming under pressure as higher U.S. tariffs on Chinese goods look increasingly likely, with President Trump asking his trade representative to consider raising proposed levies on $200 billion in imports to 25 percent from 10 percent,” Bloomberg reports. “The latest phase of the protectionist saga overshadowed an upbeat message on the American economy from the Federal Reserve.”
Once again, market news is taking a back seat to more tariff drama. It’s even sweeping news of Tesla’s bullish earnings reaction from the front page.
Just a few weeks ago, The Trump administration made good on its trade war threats, listing another $200 billion in Chinese goods that are fair game for new tariffs. The tariffs are set to begin on August 30, according to Bloomberg, comprising a broad list of items “from TV components to badger hair.”
Asian and European stocks swooned. Meanwhile, U.S. futures also tanked on the news. The Dow coughed up more than 260 points after the story broke — and the S&P 500 and Nasdaq Composite weren’t far behind, each giving back about 1% in extended trade.
But here’s the rub: The Dow recovered almost immediately, pushing higher for five straight trading days following the initial tariff shock.
I’m not saying the overnight weakness we’re seeing right now will play out exactly as it did in early July. But like any other negative news event, the market must decide when it truly begins to “matter” to stocks (if at all).
We also noted back in July that we were looking forward to earnings season to help soften the blow of the trade war rhetoric. Expectations were (and still are) high for most stocks. While most companies have met these expectations, market reaction has remained muted aside from a few high-profile names.
Moving forward, we’ll continue to pay close attention to industrial names to try and gauge investor reaction to the deluge of trade war headlines.
You’ll recall that tariff concerns and the dollar’s furious rally have taken their toll on the Industrial Select Sector SPDR (NYSE:XLI) for most of the year. XLI broke down in late April and posted capitulation lows the next month. It’s remained stuck below its February highs in a choppy range ever since. These stocks had been dead money walking for months. Some of the most recognizable industrial giants on Wall Street were even down double-digits on the year as the major averages found higher lows. No one wanted these stocks…
Following a volatile two months of summer trading, we’re not watching to see if XLI can deliver a clean breakout above its four-month trading range.
XLI’s Friday close could be telling. We’ll see if yesterday’s retreat sticks — or if we get another situation like July where buyers step in following a red open to give this sector the nudge it needs to get over the edge.