Investors Appear To Relax A Little On Encouraging News On China, Mexico Trade Fronts

Trade tensions appeared to be easing a bit on Tuesday morning, helping to boost market sentiment.

Market participants seemed to be cheered by a relatively conciliatory statement from China’s Ministry of Commerce that said economic and trade differences need to be resolved with dialogue. However, the statement also said China hopes the United States will “abandon its wrong practices,” according to CNBC.

The comments come after trade negotiations between the world’s two largest economies broke down last month, just as market participants were thinking a deal could be close. That sparked selling in equities and a flight to the relative safety of U.S. government debt.

In other trade-related news, the Washington Post reported that Republican lawmakers are talking about a potential vote on blocking the Trump administration’s planned tariffs on Mexico. Mexico’s foreign minister also made conciliatory remarks on immigration and trade.

Last week, President Trump surprised the market by threatening to impose a 5% tariff on all goods from Mexicostarting on June 10. Stocks fell on the news, with automakers taking it particularly hard given their exposure to Mexico. 

So any news that those tariffs might get walked back by lawmakers is apparently coming as a relief. But with so much selling pressure in the market in recent days, we’ll have to see whether stocks can make a meaningful rebound today.

Investors are also eyeing speakers from the Federal Reserve this week, likely hoping for clarity on what policy makers are seeing in economic data and thinking about interest rate trajectory for the remainder of the year. Investors have increasingly been expecting the central bank to cut rates this year, and yesterday St. Louis Fed President and CEO James Bullard said that might be warranted. (See more below.) 

Chances for a rate cut at the Fed’s meeting later this month now stand at around 14%, according to CME Fed funds futures. That’s still low, but up from single digits a week ago. Meanwhile, chances for a July cut are nearly 50%, futures prices suggest.

The futures market puts chances for at least one rate cut by year-end at above 95%, with high chances of two or even three cuts between now and Dec. 31. We’ll have to wait and see if the market turns out to be correct.

Four FAANGs Get Bitten

Worries about increased government oversight took a bite out of four of the FAANG stocks Monday after news reports raised investor worry over increased government scrutiny of Alphabet Inc’s GOOG, Facebook, Inc. FB, Amazon.com, Inc. AMZN and Apple Inc AAPL.

FB fell more than 7.5% while GOOGL fell more than 6%; AMZN dropped more than 4.6%, and AAPL dipped more than 1%. The declines weighed down the tech heavy Nasdaq Composite (COMP). The Communication Services sector was the day’s biggest loser, led lower by FB and GOOGL.

Meanwhile, shares of cloud-related companies Salesforce.com, Inc. CRM and Autodesk, Inc. ADSK declined as investors apparently worried about the wider fallout for companies exposed to cloud computing.

Sometimes, during broad market selloffs, tech companies have been a bastion of investor interest, sometimes helping to keep market downturns in check. That hasn’t really been happening lately, and now with the worries about heightened government scrutiny on the big tech-related firms, hopes of that happening may recede even more. 

Caution Continues

In further evidence of dimming hope when it comes to equities, investors continued to flock to U.S. government debt on Monday, with the yield on the benchmark 10-year Treasury note falling to below 2.07%.

Yields have risen this morning, but an inversion between the 3-month Treasury and the 10-year Treasury continues.

An inversion of the yield curve can sometimes be a warning sign for stock investors because it signals possible slowing corporate profits and a potential fall in stock prices. 

In another bid for a safe-haven, investors were also buying gold Monday as trade tensions continued to bother the market. 

Amid the continued risk-off mood, investors sold oil, which is considered among riskier investments and is dependent on demand from a global economy that investors are fearing may be in for slowing growth amid the trade war between the U.S. and China and tariff tensions with Mexico. 

FIGURE 1: 10-YEAR YIELD PRESSURED. The 10-year Treasury yield kept dropping on Monday as investors continued to seek the relative safety of U.S. government debt amid worries about slowing global economic growth linked to the international trade situation. Data Source: Cboe Global Markets. Chart source: Thethinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Readjustment Period: The market got some more evidence last week that the recent selling in equities has taken on a new tone. Traditionally defensive sectors Health Care, Utilities, and Consumer Staples each matched or exceeded the fall in the broader S&P 500 Index (SPX) in the last week of trading in May. The 2.6% decline in the first two sectors and 3.6% drop in Consumer Staples during the week ending on Friday, compared with the 2.6% decline in the SPX “implied that investors were retreating from stocks altogether, rather than just rotating into the safer havens” in stocks, investment research firm CFRA said in a note. But history might offer some optimism. “The S&P 500 rose in June during all five of the strongest-start years since 1945 and in 80% of the top 10 years, as compared with a normally unimpressive average return for stocks in June generally,” CFRA said.

Factory Floor Concerns: It appears that manufacturers in the United States remain generally positive even though they are concerned about the trade war. The latest manufacturing index from the Institute for Supply Management came in at 52.1 compared with a Briefing.com consensus of 52.6. While the data show that manufacturing activity continued to expand, that growth was slowing. “Respondents expressed concern with the escalation in the U.S.-China trade standoff, but overall sentiment remained predominantly positive,” the ISM said. Still, the data contribute to growing worries about a U.S.- and global-growth slowdown as the tariff row continues between the United States and China and has escalated with Trump’s recent announcement of duties on Mexico starting later this month. The ISM report “reflects a deceleration in national manufacturing activity that will contribute to the burgeoning growth concerns for the U.S. economy,” Briefing.com said.

Bullard Talks Rate Cut: St. Louis Fed President and CEO James Bullard gave voice on Monday to what some in the market have been thinking regarding monetary policy—namely, that the Fed may cut interest rates this year. “A downward policy rate adjustment may be warranted soon to help re-center inflation and inflation expectations at target and also to provide some insurance in case of a sharper-than-expected slowdown,” Bullard said in prepared remarks for a speech. His statement mentioned that policy makers face slowing economic growth expectations in the United States, with the global trade uncertainty making a sharper-than-expected downturn a risk. He also said that “inflation and inflation expectations remain below target, and signals from the Treasury yield curve seem to suggest that the current policy rate setting is inappropriately high.”

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