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Stocks stabilize, trade worries linger

Stocks ended little changed Wednesday as investors considered whether the U.S. and China would come to an agreement to resolve a more than year-long trade dispute before new tariffs are set to take effect Friday.

The S&P 500 (^GSPC) fell 0.16%, or 4.5 points, as of market close. The Dow (^IXIC) rose 0.01%, or 1.96 points, after earlier in the session having added as many as 153 points. The Nasdaq (^IXIC) fell 0.26%, or 20.44 points.

Through market close Tuesday, each of the three major indices was off more than 2%, cutting into steep gains stocks had posted in the first several months of the year.

Investors were blindsided Sunday with a tweet from President Donald Trump stating he was set to raise tariffs on $200 billion worth of Chinese goods and tack on levies to an additional $325 billion of Chinese imports, ending a five-month trade ceasefire between the U.S. and China.

Trump was spurred to announce the additional tariffs after Chinese negotiators late last week reneged on a litany of key aspects of the working trade deal, Reuters reported Wednesday, citing unnamed government and private sector officials briefed on the matter.

According to the account, China backtracked on commitments that would require it to change laws to address U.S. concerns including intellectual property theft, forced technology transfers, competition policy, access to financial services and currency manipulation. Each of these issues has been high on the Trump administration’s list of priorities for an eventual trade deal, and had in large part catalyzed the trade war in the first place.

Some observers have speculated that Trump’s Twitter post was a negotiating tactic to push China toward more concessions, but a source in Reuters’ report refuted this notion as the only motive behind the additional threats.

On Wednesday, Trump insinuated in a pair of Twitter posts that the Chinese delegation was attempting to delay a trade deal until after the 2020 presidential elections, when a different candidate could take office and potentially reach a deal with more lenient terms. He added that he was “very happy with over $100 billion a year in Tariffs filling U.S. coffers.”

‘More to lose’

Many market pundits have pointed out that the U.S. operates from a position of economic strength compared to China, especially given stronger-than-expected recent GDP and employment data. Gordan Chang, author of “The Coming Collapse of China,” told Yahoo Finance Tuesday that in this case, “China has more to lose.”

Other economists have echoed these sentiments.

“We think that the direct effects of President Trump’s threatened tariff hikes could reduce Chinese GDP by up to 0.4% and that the associated retaliation would have only a marginal direct impact on the U.S.,” Jennifer McKeown, head of global economic service at Capital Economics, said in a note. “The effects on business confidence and financial markets around the world could be more significant, potentially adding to reasons for renewed policy loosening.”

On Wednesday, exports in China were shown to have unexpectedly declined in April, underscoring geopolitical troubles still weighing on the Chinese economy even as the government has recently stepped in with policy stimulus. Chinese imports, however, improved from recent weakness.

“Chinese concerns are once again the main driver of bearish sentiment for global markets, with disappointing trade data piling on the pressure amid faltering trade talks with the U.S.,” Joshua Mahony, senior market analyst at IG Group, wrote in an email. “With much of the trade deal boost already factored in, we are seeing that unravel as China's Liu He and [U.S. Trade Representative Robert] Lighthizer are allowed just a few hours to somehow resolve a situation which looks likely to end with an escalation of tariffs between the two economic giants.”

On Wednesday, Chinese trade negotiators led by Vice Premier Liu He were set to meet with the U.S. delegation in Washington, D.C., to try and further trade discussions.

But with a near-term trade deal apparently off the table, investors have been left to reassess the potential impact of additional tariffs and protracted tensions with China. This week, many traders have turned to haven assets to escape the sharp decline in equities. Gold prices were up 0.37% to $1,290.4 per ounce in early trading Wednesday, and the Japanese yen ticked higher against the U.S. dollar. Yields fell for U.S., U.K. and German sovereign bonds as investors bid up prices.

Morning Brief

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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