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U.S., China Trade Tensions Keeping Stock Market Under Pressure

JJ Kinahan

Trade winds blew away hopes for a stock market rebound that began Friday to carry over into early trading this morning.

An escalating trade spat between the United States and China appears to have investors worried about the prospects for global economic growth. After all, the nations are the two largest economies on the planet, and a trade war could end up hurting both sides.

Last week, President Donald Trump said the United States would begin imposing a 25 percent tariff on certain Chinese goods starting July 6. In turn, China said it would impose tariffs of its own on some U.S. goods.

That pressured stocks on Friday, but equities did make a bit of an intraday comeback but not enough to end in the green. The Dow Jones Industrial Average ($DJI), the worst performing of the three major U.S. indices on a percentage basis, ended 0.34 percent lower.

Now, it’s looking like the Dow is gearing up for its fifth straight losing session as Monday appears to be shaping up to be a potentially risk-off day. The three horsemen of risk – Treasury bonds, gold and the Cboe Volatility Index (VIX) – are up this morning as investors are apparently looking to dial back on risk. Of the three, gold is perhaps the one in the most tenuous position. It's getting somewhat of a bid, perhaps because of its position as a store of value during times of uncertainty, but it’s also under some pressure as trade worries have been putting pressure on commodities and commodity-linked currencies (more on that below). 

The escalation in trade tensions comes as the United States has also been in a trade tiff with Canada, the European Union and Mexico.

Bucking Trend

The U.S. dollar starts the week near 95, a level from which it has touched and receded several times since last fall. (See figure 1 below). With the U.S. leading the charge toward higher interest rates, and with trade talks pressuring commodities such as gold and crude oil, both of which took it on the chin last week, the dollar might again test the 95 level to the upside.

Sure, a stronger dollar is great if your summer travel plans involve foreign destinations, but from an investor standpoint, you may want to keep an eye on your portfolio if the dollar pushes higher. Multinational corporations, especially exporters such as commodity companies like Exxon Mobil Corproation (NYSE: XOM) and oil services firms such as Halliburton Company (NYSE: HAL), and those with strong international ties, such as McDonald's Corporation (NYSE: MCD) and Starbucks Corporation (NASDAQ: SBUX), have historically felt the pressure of dollar strength.

And remember, the next earnings season is a few short weeks away.

Speaking of oil companies, the Energy Select Sector SPDR (ETF) (NYSE: XLE) led the way lower on Friday, and appears poised for a continuation this morning.  Energy was the worst performer among the S&P 500 (SPX) sectors on Friday as crude oil fell markedly ahead of potentially increased output arising from a meeting of the Organization of Petroleum Exporting Countries (OPEC) this week. A slowdown in global trade would also have a negative impact on demand for oil. While lower oil prices could be a boon for consumers of oil, they could negatively impact the profitability of producers.

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Figure 1: Quadruple Top?  Chart watchers are eyeing the 95 level in the U.S. Dollar Index ($DXY). The index, which measures the greenback versus a basket of foreign currencies, has touched this level 4 times since last October, only to pull back. Might this be the time it breaks through to the upside? Data source: Intercontinental Exchange. Data source: Intercontinental Exchange. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Oil in Focus

Ahead of the OPEC meeting this week, it’s worth remembering that the cartel isn’t a monolithic bloc where all members always want the same thing. Let’s say, for example, OPEC and its allies decide to boost production at a meeting this week. That could be good for, one OPEC member, which might have the capacity to produce more crude. But such a move might not be so great for several other OPEC members, which might not  have more capacity to work with and could get hurt by the price drop increased production from others would portend, he said.

Don’t Forget Housing

With so much focus on international trade issues and global oil producers, it might be worth turning some attention to U.S economic data. This week is be relatively light, but a couple of housing related items could be worth watching. May housing starts and building permits data are scheduled for release on Tuesday while May existing home sales numbers are due out Wednesday. The health of the housing market is particularly important for the economy. It’s not just construction jobs and homebuilders that are affected. There are also plenty of materials companies that get a boost from home building. And when folks buy a new home, they may also want to buy goods with which to furnish or improve it.

Stocks and Interest Rates

Interest rates aren’t the only factor that moves markets. Of course, higher rates can put a drag on stocks. But they can also signal that the underlying economy is doing well. A stronger economy can end up boosting company performance. Last week’s Fed rate hike came against a backdrop of solid economic data. And, as of Wednesday, S&P 500 1Q earnings per share had posted a 23.3 percent gain, according to S&P Capital IQ consensus estimates as noted by investment research firm CFRA. Estimates for 2Q EPS indicate a possible 18.8 percent gain, CFRA said. “While some investors viewed the commentary by Fed Chair Jerome Powell as more hawkish than expected, we remind those investors that the stock market can continue to move higher along with interest rates at these levels,” the research firm said.

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