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Global Markets Internalize U.S./China Trade Friction

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Tuesday, June 19, 2018

We wake up to a pre-market bloodbath in the major indexes this morning, with a new statement last night from President Trump deciding to impose fresh new tariffs on $200 billion worth of additional Chinese goods at 10%. This roiled markets from Asia through Europe overnight, and currently the Dow looks to open down 365 points, the Nasdaq down 100 and the S&P 500 -30.

Trump’s threats did not end there; he said that if China does not roll back its retaliatory tariffs already established on U.S. imports — and indeed if it decides to punch back following this latest round from the Trump administration — that $200 billion more Chinese goods will then be subjected to new U.S. tariffs. Doing the math, including the original $50 billion tariffs, and Trump is now threatening to tax $450 billion of the $505 billion total imported Chinese goods to this country.

China cannot possibly match this via trade tariffs, as it imports $130 billion of U.S. goods per year. But that’s not to say the world’s second-largest economy won’t have a hand to play: China owns a ton of U.S. debt and other assets, and tightening the screws on any or all of these could cause further economic pain here at home. In fact, Oxford Economics has stated that a full-blown trade war between the U.S. and China is rising, and would affect not just the U.S. and China, but global markets as well.

As a result, the top Chinese indexes — the Hang Seng and Shanghai markets — were down 2.8% and 3.8%, respectively, while the Japanese Nikkei fell 1.8%. In the Eurozone, market indexes in Germany, France, Italy, Spain as well as the FTSE all fell between 0.5% and 1.5%. Domestic markets are simply reacting to the red on the screen from elsewhere around the globe.

The Dow threatens to mark its first six-day selloff in 15 months, and the S&P 500 has closed lower in three of the last four sessions. Both indexes could lose most of the gains we’ve seen so far in June today. That said, this is not the first pre-market we’ve seen deep in the red lately, and the market has demonstrated resiliency as regular day trading has commenced. Though the Dow has been closing down recently, it’s usually fought back from its lows. Here’s hoping for more of the same today.

Housing Starts for May put up a hotter-than-expected growth headline of 5.0%, well ahead of the 1.8% gain estimated, on 1.35 million seasonally adjusted, annualized units. These also showed notable improvement over the 1.287 million new starts in April. Part of this may reflect seasonality, as more housing gets built in warmer months, but this headline number simply trounced estimates.

Building Permits, a forward indicator of future Housing Starts, performed much worse than anticipated: expected to post -1.0% on the headline, new permits fell 4.6% from April to May. This indicates some softness in the housing market ahead, although the total amount of new permits — 1.352 million seasonally adjusted, annualized units — still represents a robust market, and may still show up as positives for things like the Construction industry. Time will tell.

Mark Vickery
Senior Editor

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