foxex: The Long Slide

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Thursday's Headlines

1. U.S. Markets Tumble as Trade Talks are Officially 'Off the Rails'

2. A New World Order?

3. Brexit Update

4. Oil Prices hit the Skids

Markets Closed

Dow
25,490.47 -1.11%

S&P
2,822.24 -1.19%

Nasdaq
7,628.28 -1.58%

VIX
16.92 +14.71%

INV Anxiety Index
109.79 Very High

US 10-Yr Yield
2.296 -4.05%

U.S. Markets Tumble as Trade War Rhetoric Heats Up

We are in a far different place today than we were just a couple of weeks ago, and the markets have responded by wearing red. Today's selloff started off severely, but mellowed in the final hour or trading. Still, the rhetoric from both Washington D.C. and Beijing has taken a nasty turn.

China has responded to the increased tariffs the U.S. placed on $200 billion worth of goods by promising new tariffs of their own, and by backing away from the negotiating table.

A spokesperson for China's Ministry of Commerce told reporters today that, "...if the U.S. would like to keep on negotiating it should, with sincerity, adjust its wrong actions. Only then can talks continue."

All that uncertainty contributed to a 1.1% decline for the DJIA, and even deeper losses for the S&P500 and the Nasdaq.

Companies are Feeling it

Companies are feeling the pinch of the current tariffs and they have been telling us that through their first quarter earnings reports. Walmart, Nike and others, have said they will pass the costs of the increases down to consumers. That will impact consumer spending, which drives more than 70% of U.S. GDP. Beyond retailers, manufacturers are certainly feeling the pressure, and planning for more.

The IHS Purchasing Managers Index, released this morning, shows that the rate of purchases has fallen to a near ten-year low. It has been trending lower since last Spring, but last month's drop was extreme.

chart courtesy tradingeconomics.com

Is this Bigger than Trade & Tariffs?

What started as a tit for tat tariff war has obviously grown into something much bigger. When it was a matter of a 10% increase on $200 billion worth of Chinese imports, investment research analysts at banks like Goldman Sachs and Bank of America projected the hit to U.S. GDP and corporate earnings would be minimal. Safe to say, they have been ratcheting up their forecasts of late.

Beyond the threats to growth, there is a growing drumbeat that is warning of a larger, more ominous geopolitical shift between the U.S. and China. They are each other's biggest customers and China is the largest holder of U.S. debt among foreign countries. But, as China has put itself on a path to be the world's leader in technology through its 'Made in China 2025' agenda, and is spending trillions of dollars on its industries and infrastructure, its dominance poses a threat to the United States' seat atop the global economic throne.

This is how the research team at Bank of America Merrill put it in a note earlier this week:

"Concerns of a rising China, coupled with US domestic politics, have already elicited a sharp increase in average US tariffs. But it is important to observe that the White House strategy is shifting. Initially, Trump's tariffs on steel and aluminum were indiscriminate and included allies. Now most of the incremental tariffs have been directed at China, with the US negotiating with Canada, Mexico, Japan, or Europe in the past few months. This subtle but meaningful turn suggests to us that strong geopolitical linkages, rather than rent-seeking behavior of uncompetitive domestic industries is driving policy making."

To wit, the U.S. went from easing tariffs on Chinese goods from 1990-2016, to raising them suddenly, and extremely.

Brexit Update

We haven't touched this topic in awhile, but it has started to surface again, and not in a good way for Prime Minister Theresa May. May proposed a new Brexit plan to her own Conservative Party this week called the 'Withdrawal Agreement Bill'. The Conservative Party could not agree on it, and Andrea Leadsom, the Commons Leader, quit the party saying she could not support the new plan. There has been widespread speculation that May would resign this week as head of the Conservative Party, but remain Prime Minister. On Wednesday, members of an internal coalition of the Conservative Party, called the 1922 Committee, reportedly held a secret ballot to decide if they could hold a 'no confidence' vote on May immediately. According to the BBC, the results of that ballot will be unsealed on June 10th if May does not stand down prior to that. May is scheduled to meet with President Trump when he visits Great Britain June 3-5th.

Sounds like politics as usual in the U.K., but it's taking its toll on the British pound, which has fallen nearly 4% against the U.S. Dollar since May 6th.

chart courtesy tradingview.com

More News:

Why Netflix May Become A Safe Haven As Techs Plunge On Trade War

Getting Married? What You Need to Know About Weddings, Marriage, Money

Worst-Case Trade War Lasting To 2020 Threatens To End Bull Market

charts courtesy www.koyfincharts.com

L Brands, the owner of Victoria's Secret and Bath and Body Works, surged almost 13% today, on better-than-expected quarterly results, even despite Victoria's Secret's struggles as of late. Target rose today on more good news on the back of its quarterly report, as JP Morgan upgraded its rating on the stock, moving its target price from $81 to $100.

Netapp fell today on disappointing quarterly results and weak guidance, as the company continues to struggle with data center sales. Hess, and other energy companies fell today, as crude oil futures dropped.

photo courtesy unitedsoybean.org

Word of the Day

Farm Income

Given the news that President Trump has signed a bill to send $16 billion to U.S. farmers as a bailout to make up for losses they may suffer as part of the trade war with China, we thought this term appropriate for today.

Farm income refers to profits and losses incurred through the operation of a farm. A farm income statement (sometimes called a farm profit and loss statement) is a summary of income and expenses that occurred during a specified accounting period. This period is usually the calendar year for farmers (January 1 - December 31). Some farms are eligible for special farm tax credits and other tax breaks.

Farm Income does not include aid packages like the one some farmers will receive as part of this bailout package.

photo: Justin Sullivan/Getty Images

Today in History

May 23, 1995: Sun Microsystems launches Java, the universal Internet programming language that brings white space and greater interactivity to millions of websites and Internet users. That's a photo of James Gosling, known to many as the father of the Java programming language.

Source: http://www.sun.com/aboutsun/coinfo/history.html#1995

Chart of the Day: Crude Oil Plummets on Demand Fears

Crude oil prices continued to plunge, well over 5% on Thursday, as concerns over U.S.-China trade tensions deepened. These concerns have hit all corners of the market, most notably global equity markets. But the impact on oil prices has been particularly severe due to expectations that an extensive trade war would pressure global economic growth and demand for oil, especially in the U.S. and China, the world's largest oil consuming nations.

Aside from rising trade conflicts between the two economic superpowers, a slew of global manufacturing data on Thursday showed lower-than-expected numbers from Japan, Germany, the eurozone, and the U.S. As the manufacturing sector is a major source of oil consumption, Thursday's disappointing results do not bode well for demand and prices. And on the supply side, U.S. inventory data from the past two weeks has shown far greater supply than expected, which is also weighing heavily on the price of crude oil.

As shown on the chart above, the drop in crude oil futures since the late-April high has been pronounced – worse than -12% in a month's time. Prior to that high, price had been uptrending strongly since late December as OPEC countries and their allies voluntarily limited output in efforts to stabilize oil prices. Now, however, demand worries have prompted a sharp drop below both the 50-day and 200-day moving averages, as well as major support at $60. In the process, oil futures fell to a new two-month low on Thursday. Clearly, the previous uptrend recovery has been either severely interrupted or reversed. With any continued pressure on oil due to trade war fears, the next likely downside target is around the key $55 support level.