China Halts U.S. Soybean Purchases, Ratchets Up Rhetoric As Trade War Continues

Although Wall Street this morning looked poised to take a break from recent selling, it appears that the market is lacking an impetus to buy in a meaningful way.

In general, there appears to be a change of mindset going on in the market, fueled by the breakdown of tariff talks with China, the Fed’s unwillingness to cut rates, and an earnings season that saw growth curbed after big gains in 2018.

Yesterday, as risk-off sentiment pressured equities, the S&P 500 Index (SPX) sank below the key psychological level of 2800 for the first time since late March after bouncing off of it earlier this month. 

The benchmark also fell below its 200-day moving average of 2776 but ended up bouncing back by the end of the session. That could be part of this morning’s bounce. Still, it was the first time in more than two months that the SPX had slid below its 200-day moving average, often seen as a key level to watch.

One thing to keep in mind is that stocks tend to retest levels like that, so we’ll have to wait and see whether that happens, and if so, whether that level holds.

The financial news continues to be dominated by U.S.-China trade-related headlines. Bloomberg reported that China has put purchases of American soybeans on hold. And Chinese Vice Foreign Minister Zhang Hanhui accused the United States of “naked economic terrorism, economic homicide, economic bullying.”

Flight to Safety

This week many investors seem to have been rushing to the sidelines and into more conservative investments as they wait out the worsening trade situation. China’s recent threat to use its supply of rare earth elements as a weapon is a worrying escalation. Rare earth elements are used in technology like cell phones, electric cars, and wind turbines, and China produces the great majority of the world’s rare earth supplies.

China’s threat, carried in state media, might indicate a worsening relationship here. Beijing went pretty deep in the bag to throw out something that would hurt. Whether they actually do curb exports is an open question, and it would probably hurt China’s economy. It shows, however, just how negative the situation has become.

Government Debt In Demand

Treasuries remained a big focus Wednesday, with the benchmark 10-year yield finishing Wednesday near 2.26% after falling below 2.25% at times during the day, its lowest level since late 2017. Even more significant, maybe, is the yield curve “inversion” between the 10-year and three-month Treasury notes. The three-month yield was 10 basis points above the 10-year yield, the widest inversion since the last recession.

Some economists say an inverted yield curve is sometimes the sign of a pending recession, though others say the relationship isn’t necessarily an accurate prediction. What it does show at this point, however, is that investors appear to be seeking shelter in what they see as a conservative part of the market rather than taking chances with more aggressive investments like stocks.

FIGURE 1: 10-YR YIELD EASING.The yield on the 10-year Treasury fell Wednesday as investors sought the relative safety of government debt and sold out of stocks. Data Source: Cboe Global Markets. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Mulling a Potential Rate Cut: Some market participants seem to be seeing a potential silver lining to the worries about global economic growth stemming from trade-related worries. The market’s recent softness has some investors getting more optimistic about a possible rate cut. Chances of a rate cut at the Fed’s June meeting rose to 10% on Wednesday from around 6% earlier this week, according to CME Group futures. Odds that rates will be lower in September than they are now are above 50%, futures prices suggest, and futures also suggest there could be two cuts by next January. Earlier this month, minutes from the Fed’s last meeting indicated that the Fed was going to be “patient” with rates. We’ll have to wait and see if anything changes at the next meeting, scheduled for June 18-19.

Not If, But When: Recessions are part of the economic cycle, and eventually we’ll see another one. Trying to time one, however, is a losing battle, as most economists would probably admit. While some of the latest manufacturing and corporate spending data do look a bit soft, there were also some positive numbers recently (April jobs, for instance) and it’s possible that the economy might end up in relatively decent shape if the trade situation gets resolved. At least one research firm is offering some optimism. “We continue to forecast a slight global economic slowdown in 2019 and 2020, versus 2018, but are not seeing signs of recession,” investment research firm CFRA said in a note Wednesday. 

About Face: A reversal in optimism about the U.S. and China striking a trade deal isn’t the only thing that’s been behind selling in equities. The government pulled a bullish rabbit out of its hat in April when it estimated Q1 gross domestic product (GDP) growth at an annualized rate of 3.2%, well above the Street’s expectations. (This morning, the government’s second Q1 GDP estimate came in at an annualized rate of 3.1%.) At the time, that, along with strong April jobs and wage growth, helped stocks to new highs. However, since then, the pendulum has swung as negative rates in Europe, an increasing fear that a “no-deal” Brexit might happen, and the festering trade issues between the U.S. and its biggest partners all ganged up on investors. It’s an interconnected world. If rates are negative in Europe and Japan, that’s often going to weigh on yields here in the U.S., and potentially on U.S. stocks.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.