The acceleration of trade war risk on Friday virtually guarantees further market volatility and downside activity in the week ahead, while minimizing chances of a turnaround—notwithstanding any Fed 'candy' that may be on offer. Equities, yields and the dollar all plunged as the trading week closed, while Treasurys, gold and the yen surged.
China's announcement Friday of an additional $75 billion in tariffs on U.S. goods, weighed heavily on markets. All four major U.S. indices opened lower. Clearly, the timing of China's retaliatory announcement in answering the U.S.’s recent trade war moves, just minutes before Federal Reserve Chairman Jerome Powell gave his address in Jackson Hole, was deliberate...and effective.
During his speech, Powell seemed to play it safe. “We will act as appropriate to sustain the expansion,” he said, while not articulating whether there will be any additional rate cuts. The Fed chair went on to say that there is no playbook for a trade war.
Though Powell asserted that the U.S. economy is doing well, he noted that it faces "significant risks," which could bolster the case for another interest rate cut next month. Still, he didn't clarify where the path of interest rates will lead.
Stocks rebounded modestly during Powell's speech. Bets remained for another two to three rate cuts for the year, demonstrating that Powell had threaded the needle yet managed to keep the status quo and a balanced market.
That was short-lived however. Powell's remarks didn't satisfy Donald Trump. The president let loose a tweetstorm that sent markets spiraling downward.
His first salvo, “My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?,” was followed two minutes later by another missive ordering American companies “to immediately start looking for an alternative to China.” Within the hour the S&P 500 and the Dow Jones Industrial Average each dropped 1.7%; The Russell 2000 fell 2.07% and the NASDAQ Composite crashed 2.37%.
Additional losses followed; the SPX closed the day down 2.59%, with all sectors in the red. Utilities, -1.05%, outperformed, while Technology, the sector most affected by trade issues, led the declines, down -3.31%. Apple (NASDAQ:AAPL) shares lost 4.6%.
For the week, the benchmark index slumped 1.44%, with most sectors lower. Consumer Discretionary and Utilities shares, up +0.52% and +0.16% respectively, were the only gainers. Materials, another export-sensitive sector, -2.95%, underperformed.
The S&P confirmed again the resistance of its broken uptrend lines since the December bottom, the top of its rising flag (black) and the pennant top (red). Strictly speaking, the index broke the pennant bottom, completing the pattern, but due to its small penetration and an earlier intraday downside penetration, we’d be more comfortable with calling the pennant after a fall below the Aug. 5 low at the least, if not below the 2,800 round number, protected by the 200 DMA.
The U.S. Treasury market recession indicator—the spread between 2- and 10-year rates—flirted with inversion yet again. The three-month vs 10-year yield curve hit the most-inverted level since March 2007.
Yields on the 10-year note fell to 1.533, the lowest since the Aug.15 drop to 1.502, which was the lowest since July 2016. There's huge demand right now for safe haven assets, another leading indicator for an upcoming recession. U.S. manufacturing is already in recession, and there has been a big downward revision to employment growth.
Technically, 10-year yields may have provided a downside breakout, completing a bearish flag. This has been the fourth straight weekly loss, complimenting the equity slide. As well, the bearish pattern matches that of the S&P 500, suggesting supply will continue to outpace demand in the medium term.
The dollar fell 0.54% for the second day, to its lowest close since Aug. 12, after Trump said “we have a very strong dollar and a very weak Fed."
The dollar-yen pair fell 0.97% for the second day, to just 0.1% from its Aug. 12 close, its lowest level since Mar. 23. That 104.74 close was the lowest for the pair since Nov. 7, 2016.
Gold gained 1.87% on Friday. The yellow metal finished the week at $1,536.75, jumping to its highest point since April 2013.
Oil fell for the third day, on the prospects of slumping demand amid a slowdown caused by trade tensions. Technically, crude traded along its falling channel.
As if the heightened trade tensions weren't enough, on Saturday at the start of the G7 summit in Biarritz, France, Trump administration officials accused France of deliberately embarrassing the U.S. by ignoring its input and focusing the agenda on 'niche' issues to help President Emmanuel Macron drum up support at home. Though this could easily develop into an international incident, ramping up tensions on the European front, it's unclear how much market impact this will have next week.
Markets will likely be focused on the world's two largest economies revving up for another round, with Trump no longer veiling his threats. In fact, it's difficult to see how either economic powerhouse will be able to back down while saving face, as each maneuvers to dominate global influence.
All times listed are EDT
2:00: Germany – GDP: likely to remain flat at -0.1% QoQ.
10:00: U.S. – CB Consumer Confidence: probably retreated to 130.0 from 135.7 previously.
3:55: Germany – Unemployment Change: probably jumped to 3K from 1K.
8:30: U.S. – GDP: forecast to edge down QoQ to 2.0% from 2.1% for the second quarter.
10:00 U.S. – Pending Home Sales: forecast to slow to 0.1% from 2.8% in July.
5:00: Eurozone – CPI: expected to remain flat at 1.0% YoY.
8:30: Canada – GDP: expected to edge down to 0.1% MoM from 0.2%.
21:00: China – Manufacturing PMI: likely to slip to 49.6 from 49.7.
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