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August 24, 2018

Markets Nervous on Trump, Trade War Escalation

President Trump this morning retreated to his favorite media “comfort zone,” Fox & Friends, to assert: “If I ever got impeached, I think the market would crash.”
That’s uncertain. But one thing is for sure: Investors aren’t fond of the “I word,” as evidenced today by the stock market’s across-the-board decline. The Dow Jones Industrial Average, S&P 500 and Nasdaq all closed in the red.
Trump’s worsening legal peril and the imposition of new tariffs rattled investors. Energy and financial stocks were among the biggest losers. The CBOE Volatility Index (VIX), the so-called “fear index,” jumped 2.37%.
The U.S. and China on Thursday upped the ante in their bitter trade war, imposing 25% tariffs on $16 billion worth of each other’s goods. This tit-for-tat tariff exchange occurred today even as low-level officials from both countries held discussions in Washington, DC.
Since July, the world’s two largest economies have implemented tariffs on a combined $100 billion worth of products, with additional tariffs planned in coming weeks.
China’s Commerce Ministry today complained that the Trump administration was “remaining obstinate” by implementing the latest tariffs. Beijing vowed to file a complaint with the World Trade Organization (WTO), an entity that Trump has openly disdained as unfair.
Trump has threatened to slap duties on nearly all of the more than $500 billion worth of goods that China annually exports to the U.S. The goal is to pressure China to further open its markets. Other points of contention include China’s industrial subsidy programs and alleged intellectual property theft.
Shoot first, talk later…
U.S. Commerce Secretary Wilbur Ross, a staunch protectionist, put the trade conflict in the terms of a gun battle. He stated Wednesday: “At the end of the day, we have many more bullets than they do.”
Problem is, China already is finding alternative sources for many U.S. products, notably crucial agricultural products such as soybeans. The belief that China will surrender because it’s too dependent on American goods appears misguided.
The consensus of economists is that every $100 billion worth of imports hit by tariffs will reduce global trade by about 0.5%.
Tariffs implemented by Washington today encompass 279 product categories including semiconductors, plastics, and specialty chemicals. China’s new tariffs cover 333 U.S. products including steel products, coal, copper scrap, and fuel. The tariffs on fuel weighed on energy shares today.
Global growth is imperiled. As the short-term boost from the Trump tax cuts diminishes, the adverse effects of the trade war will start to kick in. Several major export-dependent manufacturers have downgraded their guidance for full-year 2018, citing higher input costs because of tariffs.
The trade shootout between the U.S. and China amounts to unnecessary self-harm, which is all the more unfortunate given the continuing strength of key economic indicators.
The U.S. Labor Department reported Thursday that initial claims for state unemployment benefits fell 2,000 to a seasonally adjusted 210,000 for the week ended August 18 (see chart):

The consensus forecast had called for claims rising to 215,000 in the latest week.
Last week’s better-than-expected downturn in unemployment benefits is further confirmation that the labor market remains strong despite escalating trade tensions and political dysfunction in Washington, DC.
Today’s data marked the third consecutive week of declines for unemployment benefit claims. In July, claims fell to their lowest level since 1969, even though the workforce is considerably larger than it was back then.
The robust labor market gives the Federal Reserve more leeway to raise interest rates, to help prevent wage growth from stoking inflation. The Fed is widely expected to hike rates again next month.
The Fed has already raised rates twice this year. There’s an old Wall Street adage: “Three hikes and a stumble,” whereby the third interest increase by the Fed in a single cycle usually leads to a decline in stocks.
What’s more, historical precedent tells us that stocks tend to fall in advance of U.S. midterm elections, as political uncertainty unnerves investors.
Exacerbating this uncertainty are the increasing odds of Trump’s impeachment. The president’s former personal lawyer Michael Cohen Tuesday pleaded guilty to campaign finance violations while on the same day, former campaign manager Paul Manafort was found guilty on charges of tax and bank fraud. Manafort faces another trial on separate charges in September. Under oath, Cohen directly implicated Trump in a federal crime.
Wall Street is concerned that the GOP could get wiped out in the fall elections, which would upend Trump’s pro-business policies and also make his removal from office more likely.
Another source of worry is the shrinking gap between U.S. Treasury two- and ten-year yields. This yield curve in recent days has narrowed to its tightest spread since August 2007. A narrowing spread indicates investor apprehension about the economy. If the spread turns negative, watch out. That’s a reliable predictor of imminent recession.
The upshot: We’re facing the growing likelihood of a stock market downturn in the autumn.
Courtesy of John Persino, Investing Daily (More from Investing Daily Here

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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