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Beyond the Numbers

Retaliatory Tariffs By China May Weigh On Wall Street
5/13/2019 9:05 AM

The major U.S. index futures are currently pointing to a sharply lower opening on Monday, with stocks likely to pull back following the substantial rebound seen over the course of the previous session.

Concerns about the escalating trade dispute between the U.S. and China are likely to weigh on Wall Street after China announced plans to raise tariffs on up to $60 billion worth of U.S. goods.

China said increased tariffs on a total of 5,140 U.S. products would take effect June 1st, with the tariffs reportedly ranging from 5 percent to 25 percent.

The decision to raise tariffs on U.S. goods comes in retaliation for the U.S. move to increase the tariffs on approximately $200 billion worth of Chinese goods to 25 percent from 10 percent.

China is following through on its pledge to take “necessary countermeasures” in response to the tariff increase even though President Donald Trump warned the situation “will only get worse” if China retaliates.

Trump has sought to continue to pressure China to reach a trade agreement in a series of posts to Twitter, telling the communist country the deal will become “far worse for them if it has to be negotiated in my second term.”

“I say openly to President Xi & all of my many friends in China that China will be hurt very badly if you don’t make a deal because companies will be forced to leave China for other countries. Too expensive to buy in China,” Trump tweeted. “You had a great deal, almost completed, & you backed out!”

Reflecting considerable sensitivity to sentiment regarding the escalating U.S.-China trade dispute, stocks showed a substantial turnaround over the course of the trading session on Friday after moving sharply lower early in the session.

The major averages bounced well off their worst levels of the day and into positive territory. The Dow climbed 114.01 points or 0.4 percent to 25,942.37, the Nasdaq inched up 6.35 points or 0.1 percent to 7,916.94 and the S&P 500 rose 10.68 points or 0.4 percent to 2,881.40.

Despite the rebound on the day, the major averages moved sharply lower for the week. The Nasdaq plunged by 3 percent, while the Dow and the S&P 500 tumbled by 2.1 percent and 2.2 percent, respectively.

Stocks initially came under pressure amid renewed concerns about the impact of a U.S.-China trade war after President Donald Trump followed through on his threat to raise tariffs on Chinese imports.

The U.S. hiked the tariff on $250 billion worth of Chinese goods from 10 percent to 25 percent after the U.S. and China failed to reach a trade deal by a midnight deadline.

Additionally, Trump noted in a post on Twitter that the process has begun to place tariffs on the remaining $325 billion worth of Chinese imports.

Trump praised the massive tariff payments to the U.S. Treasury and said there is "absolutely no need to rush" to reach a trade agreement with China.

However, stocks showed a significant recovery after Treasury Secretary Steven Mnuchin wrapped up a second day of trade talks, calling the discussions "constructive."

The rebound on Wall Street reflected how sensitive the markets are to the sentiment regarding the escalating trade dispute, with traders generally still optimistic a deal would eventually be reached.

The developments on the trade front largely overshadowed a typically closely watched report from the Labor Department showing consumer prices increased by slightly less than expected in April.

The Labor Department said its consumer price index rose by 0.3 percent in April after climbing by 0.4 percent in March. Economists had been expecting another 0.4 percent increase.

Excluding food and energy prices, core consumer prices inched up by 0.1 percent for third consecutive month compared to economist estimates for a 0.2 percent uptick.

Compared to the same month a year ago, consumer prices in April were up by 2.0 percent, reflecting a modest acceleration from the 1.9 percent growth in March.

The annual rate of growth in core consumer prices also crept up to 2.1 percent in April from 2.0 percent in the previous month.

Utilities stocks showed a significant move to the upside over the course of the session, driving the Dow Jones Utility Average up by 1.6 percent. The index ended the previous session at a two-month closing low.

Considerable strength also emerged among chemical stocks, as reflected by the 1.5 percent gain posted by the S&P Chemical Sector Index.

Software and commercial real estate stocks also moved notably higher on the day, while substantial weakness remained visible among tobacco, gold, and biotechnology stocks.

Commodity, Currency Markets

Crude oil futures are jumping $0.96 to $62.62 a barrel after edging down $0.04 to $61.66 a barrel last Friday. Meanwhile, after rising $2.20 to $1,287.40 an ounce in the previous session, gold futures are climbing $3.40 to $1,290.80 an ounce.

On the currency front, the U.S. dollar is trading at 109.11 yen compared to the 109.95 yen it fetched at the close of New York trading on Friday. Against the euro, the dollar is valued at $1.1258 compared to last Friday’s $1.1233.

Asia

Asian stocks fell broadly on Monday after trade talks between the United States and China ended without a resolution last week and U.S. President Donald Trump on Sunday defended his tariff policy, saying the U.S. is right where it wants to be with China.

China's Shanghai Composite Index tumbled 35.50 points or 1.2 percent to 2,903.71 as investors await Beijing's next move on the trade front. The Hong Kong market was closed for a holiday.

Japanese shares fell notably as investors remained wary about renewed trade tensions between the U.S. and China. The Nikkei 225 Index slid 153.64 points or 0.7 percent to 21,191.28, while the broader Topix dropped 8.28 points or 0.5 percent to 1,541.14.

China-related stocks paced the decliners, with electronic parts maker Rohm losing 4.4 percent and construction machine maker Komatsu ending down 1.9 percent. Toshiba shed 0.7 percent after posting a steep drop in its 2018 operating profit.

Australian markets fell slightly, with banks falling as Commonwealth Bank of Australia posted disappointing third quarter results amid hefty remediation costs and shares of other top banks went ex-dividend.

The benchmark S&P/ASX 200 Index dipped 13.30 points or 0.2 percent to 6,297.60, while the broader All Ordinaries Index ended down 11.80 points or 0.2 percent at 6,381.30.

Commonwealth Bank of Australia fell 2.5 percent after its cash profit declined 28 percent in the third quarter. Rival ANZ lost 3.9 percent and investment bank Macquarie Group declined 3.6 percent on going ex-dividend. National Australia Bank gave up 2 percent and Westpac Banking Corp eased 0.4 percent.

Energy stocks ended mixed, while mining heavyweights BHP and Rio Tinto ended modestly higher.

Reliance Worldwide Corp shares slumped 15.6 percent after the plumbing supply company lowered its full-year earnings outlook due to the lack of a winter freeze in the southern U.S.

Troubled fleet leaser Eclipx Group tumbled 4.7 percent after saying it has received interest from several parties for its two under-performing businesses.

Seoul stocks hit a four-month low as trade woes deepened. The benchmark Kospi ended down 29.03 points or 1.4 percent at 2,079.01, its lowest since January 15, while the won hit its lowest level since 2017 on growing anxiety over whether the U.S. and China will reach a trade resolution.

Europe

European stocks have fallen on Monday as the U.S.-China trade talks ended without an agreement and optimism about a deal between Labour and the Conservatives faded, making British Prime Minister Theresa May's position increasingly vulnerable.

While the German DAX Index has tumbled by 1.4 percent, the French CAC 40 Index is down by 1.1 percent and the U.K.’s FTSE 100 Index is down by 0.5 percent.

The pound has slid against its major counterparts after Bank of England Deputy Governor Ben Broadbent cautioned that a prolonged delay to Brexit would damage the long-term economic outlook and asserted that further interest rate hikes would be "gradual."

Metro Bank has moved sharply lower in London on equity dilution worries. Dignity, a provider of funeral related services, has also come under pressure after a profit warning.

Daimler has also slumped on reports that China's BAIC Group is seeking to buy up to a 5 percent stake in the German automaker.

On the other hand, Britain's largest energy supplier Centrica has shown a notable move to the upside after reaffirming its full-year outlook.

Stock market operator Euronext has rallied in Paris after it won regulatory approval from Norway's finance ministry to buy up to 100 percent of Oslo Bors.

In economic releases, France is forecast to expand at a steady pace in the second quarter, according to a monthly survey from Bank of France.

Gross domestic product is expected to grow 0.3 percent in the second quarter, the same rate as registered in the first quarter.

U.S. Economic Reports

No major U.S. economic data is scheduled to be released today, although reports on import and exports prices, retail sales, industrial production, and housing starts may attract attention in the coming days.

Federal Reserve Vice Chairman Richard Clarida is scheduled to give opening remarks at the New England Perspectives on Fed Policymaking conference at the Boston Fed at 9:10 am ET.
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