Monday May 6th

6-05-2019

Dow futures drop more than 450 points as China considers skipping trade talks after Trump threat

A sharp sell-off will start the week on Wall Street after President Donald Trumpsaid on Sunday that the U.S. will hike tariffs on goods imported from China, casting doubt on recent optimism that the world’s two largest economies were close to a resolution to their trade battle. Dow Jones Industrial Average futures dropped 457 points as of 8:32 a.m. ET which implied an opening decline of about 440 points. S&P 500 futures lost 1.5% and Nasdaq-100 Index futures dropped 1.9%. Shares of Apple and Caterpillar dropped more than 2.6% in premarket trading on fears of a trade war. Chipmakers were especially hard hit with Nvidia and Advanced Micro Devices losing more than 3.5%. The sharp move down sent the Cboe Volatility index surging. The VIX, which is considered to be the best gauge of fear in the stock market, jumped to 17.24 from 12.87 and touched its highest level since Jan. 30. Trump said in a tweet Sunday afternoon that the current 10% levies on $200 billion worth of Chinese goods will rise to 25% on Friday. He also threatened to impose 25% tariffs on an additional $325 billion of Chinese goods “shortly.” Though trade negotiations between Washington and Beijing officials are set to resume on Wednesday, the president lamented that the progress is moving “too slowly” as China tries to re-negotiate terms of the deal. Trump said in another tweet Monday that the U.S. is losing between $600 and $800 billion a year on trade, noting: “we’re not going to be doing that anymore.” The Wall Street Journal reported that China is considering cancelling its trade talks with the U.S. this week in light of Trump’s latest threats. Citing a source, the Journal said Beijing had been surprised by the new threats. Two sources briefed on talks confirmed that news to CNBC. The Chinese may back out of negotiations this week after Trump’s escalated tariff threat, they said, abandoning a six-month truce after Beijing waffled on some previously discussed commitments. One source said Chinese Vice Premier Liu He will likely cancel the trip he’d planned for himself and a 100-person delegation for a final round of talks that U.S. officials had previously said could yield a deal by Friday. Chinese officials cancelled a trip in late September 2018 in similar circumstances. A second source said Trump’s decision to more than double the tariff rate on $200 billion of goods was meant to send a message to Liu not to come to the U.S. with more “empty offers.” The White House, U.S. Treasury and U.S. Trade Representative’s office did not immediately respond to CNBC’s requests for comment. The apparent about-face in trade sentiment left some Wall Street insiders worried about the effect on the U.S. equity market, fresh off record highs. “Another turn of the screw tighter Sunday from the President’s hard-ball tactics with the China trade talks, and his pair of tweets look like they could unleash a sharp stock market correction,” said Chris Rupkey, chief financial economist at MUFG Union Bank, in a note. “For weeks now markets have been lulled to sleep on the US trade war with China thinking an agreement was imminent. No more.” “This has all the makings of a complete disaster that could lead the stock market to crater this week and send those external risks to the US economic outlook soaring,” he added. The S&P 500, up 17.5% in 2019 alone, notched a record close on Tuesday. The tech-heavy Nasdaq Composite, which has soared more than 20% this year, clinched a record close on Friday. The S&P 500 is set to drop 1.5% on Monday, which would be its biggest one-day decline since March 22, when it dropped 1.9%. As the talks near an anticipated end and delve into thorny issues including intellectual property rights, Trump may be hoping to use the strength of the U.S. economy and markets to his advantage. U.S. markets saw sizable gains on Friday after the Labor Department said the American economy added a robust 263,000 jobs in April, with the Nasdaq posting its best day in seven weeks, hitting a fresh record close in the process. The Russell 2000 outperformed and posted its best day since January while the S&P 500 saw its best day in a month. Despite the fresh enthusiasm, hoping to leverage the relative health of the American stock market and broader economy in the hopes of extracting a better deal in the future could leave some wondering how much longer Wall Street will have to wait for a permanent solution. Trade officials “kept saying that a deal was imminent, so the market could be disappointed in the near term,” said Bruce McCain, chief investment strategist at Key Private Bank. “I think that some deal was priced in to a degree … the market’s baked in a lot of positives.” McCain said that while an economic recession still looks unlikely anytime soon, he agreed with Rupkey’s expectations for a sell-off and said he wouldn’t be surprised to see a drop in the range of 5% to 10% if trade negotiations stall. The president’s announcement also appeared to contradict fresh suggestions from Treasury Secretary Steven Mnuchin and White House chief of staff Mick Mulvaney. Asked Tuesday about Mnuchin’s prior suggestion that the White House could announce an agreement with Beijing in the next two weeks, Mulvaney said, “I think that’s fair.” The positive outlook from Mnuchin and Mulvaney — as well as upbeat commentary from director of Trump’s National Economic Council, Larry Kudlow — has often met contradiction from trade hardliners like U.S. Trade Representative Robert Lighthizer. Lighthizer, known for his hawkish economic views toward China, has encouraged Trump not to remove the taxes on Beijing’s goods until it shows it is complying with the terms of the agreement. “Bob Lighthizer has Trump’s ear, not so much Mnuchin and Kudlow in the final days of the trade talks,” said Larry McDonald, editor of The Bear Traps Report. “The hardball playbook strikes again.” Wall Street also contended with news of the U.S. deploying a carrier group and bombers in the Middle east as tensions with Iran increase. The move, according to national security advisor John Bolton, said this was a warning to the Iranian regime, noting: “The United States is not seeking war with the Iranian regime, but we are fully prepared to respond to any attack.” Stocks in China plummeted on Monday following a re-escalation in U.S.-China trade tensions as President Donald Trump declared an impending increase in tariffs rates on $200 billion of Chinese goods. The Shanghai composite fell 5.58% to close at 2,906.46, while the Shenzhen component dropped 7.56% to finish at 8,943.52. The Shenzhen composite also fell 7.381% to close at about 1,515.80. Over in Hong Kong, the Hang Seng index slipped 2.90% to close at 29,209.82. Markets in Japan and South Korea were closed on Monday for holidays. Oil prices tumbled on Monday after U.S. President Donald Trump said he would sharply raise tariffs on Chinese goods this week, risking the derailment of trade talks between the world’s two biggest economies. U.S. West Texas Intermediate crude futures were down 67 cents, or 1.1%, at $61.27 per barrel at 7:20 a.m. ET (1120 GMT). WTI hit $60.04 earlier in the session, its lowest since March 29. Brent crude futures fell 58 cents to $70.27 per barrel. Brent earlier hit its lowest since April 2 at $68.79. Gold prices climbed on Monday after U.S. President Donald Trump threatened to raise tariffs on Chinese goods, escalating Sino-U.S. trade tensions, which prompted investors to sell riskier assets and boost safe-haven bullion. Spot gold was up 0.2 percent at $1,281.63 per ounce. U.S. gold futures also gained 0.2 percent to $1,283.20 an ounce.