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Markets & ETFs Digest Trade Spat: Is It a Dead-Cat-Bounce?

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After a bloody start to the week on full-blown trade tensions, markets bounced back on Wednesday. A trade war is now real as China has decided to hit back at the tariff hike by the United States on $200 billion worth of Chinese goods starting May 10. The increased Chinese tariff on $60 billion worth of U.S. imports will be put into effect on Jun 1. Not only this, Trump will impose 25% tax on an extra $325 billion of Chinese goods “shortly.”

While markets reacted negatively to the news at the start of May, efforts for bottom fishing probably have boosted sentiments. More than half of S&P 500 is now in correction. Big names of the Dow Jones Industrial Average with solid exposure to global trade — Intel INTC, Boeing BA, Caterpillar CAT, 3M MMM and Apple AAPL — are all down 20% or more from their 52-week highs. Meanwhile, Trump also indicated that trade talks are not dead yet.

Why the Rebound?

With the U.S. economy still in fine fettle, some investors probably want to dig into the undervalued status of the stock market. The Dow Jones rose about 207 points on May 14, the best day in a month. Tech-heavy Invesco QQQ Trust QQQ added about 1.1% on May 14 (read: Least-Hurt Tech ETFs as China Hits Back).

In a note to clients on Monday, Citi said its China economists are “cautiously optimistic that a trade deal can eventually be signed.” But it added that the “window to avoid further escalations in US/China tensions is closing fast,” per an article posted on CNBC.

Overall, all those sectors and ETFs that are highly linked to trade tensions and lost heavily early in the week, tried to regain ground and posted the maximum gains. These ETFs include S&P Oil & Gas Eqpt & Services SPDR XES (Up 3.4%), Oil Services Vaneck ETF OIH (Up 3.4%), Ipatha.B Grains Subindex TR ETN JJG (Up 3.2%), Teucrium Soybean SOYB (Up 3.1%), DWA Technology Momentum Invesco ETF PTF (Up 2.8%), Alps Medical Breakthroughs ETF SBIO (Up 2.6%) and Semiconductor Vaneck ETF SMH (Up 2.6%).

China-centric ETFs like Xtrackers MSCI China A Inclusion Equity ETF ASHX (up 3.4%), Reality Shares Nasdaq Nexgen Economy China ETF BCNA (Up 3.1%) and VanEck Vectors ChinaAMC CSI 300 ETF PEK (up 2.8%) have also posted material gains on May 14.

Globally, iShares MSCI ACWI ETF ACWI (up 0.9%), iShares Asia 50 ETF AIA (up 1.4%) and iShares MSCI Emerging Markets ETF EEM (up 1.4%) all gained strength.

But Will the Rally Last?

A full-scale trade war means lower global growth and corporate profits, which will eventually drag stocks down. The New York Fed’s gauge of recession probability over the coming one year is now at 27.5%, the highest since the financial crisis.

Inflation outlook is darkening as well, with the spread between the 5-year Treasury note and the 5-year Inflation Protected Treasury Security is at the “breakeven” level, pointing to 1.75% inflation, below the Fed’s desired 2% level, per CNBC.

Coming to Fed’s action, forget about rate hikes, there is nearly a 40% chance of a 25-bp rate cut in September, according to the CME. The chance of a rate cut in June meeting is 13.3%.

Is It Time to Flock to Safer Bet?

Against this backdrop, investors can bet on safer ETFs like SPDR Gold Shares GLD, InfraCap REIT Preferred ETF PFFR (which yields about 4.39%), Invesco S&P 500 Low Volatility ETF SPLV, Invesco Taxable Municipal Bond ETF BAB (yields 4.09% annually) and Global X SuperDividend U.S. ETF (DIV - Free Report) (yields 7.25% annually) (read: SALT Making Muni Bond ETF Investing Sweeter).

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