Market Update - May 10, 2019Submitted by Jodi Vleck , Beta Wealth Group on May 13th, 2019
U.S. stocks experienced a negative week (which continues this morning), as hopes for a U.S.-China trade deal in the works for months deteriorated and, by Friday, implementation of additional tariffs following a pre-set deadline. Fears of China backing out of a deal continued to put pressure on equity markets, where the technicals were seen as a bit extended by some during recent weeks. It was apparent that almost all equity sentiment for the week was driven by the tariff issue, which resulted in the removal of the market’s premium of an assumed completed trade deal to some degree.
Specifically, the week had started poorly as tweets over the prior weekend from the President regarding frustration with progress in the U.S.-China trade negotiations pointed to tariff rate increases taking effect ‘shortly’ (which alluded to the previously-set deadline of May 10). This was in regard to the second $200 bil. tranche of goods being upped from 10% to 25% (the relatively minor first tranche at a tariff rate of 25% affecting $16 bil. of goods went into effect last summer).
Despite the negative headlines during the week, there appears to still be a window of time for a deal to be hashed out, alluded to by Treasury Secretary Mnuchin, stating that talks were continuing with progress being made. The disconnect between macro policy and micro logistics were perhaps best exemplified by analysts reviewing the approximate 2-3 week period of a cargo ship’s transit time from China to the U.S. for potential impacts, as tariffs would not technically apply to goods already en route. Assuming this second tranche remains in effect for now, this would leave the final tranche of $300 bil. in Chinese exports under threat, with an announcement that ‘paperwork is being drafted’ to begin the process of implementing tariffs here as well, but this could take time and leaves room for a deal in the meantime. While it’s certainly likely the tariff impositions are a negotiating tactic, it remains to be seen how much disruption and uncertainty will affect markets in the interim.
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Every sector of the S&P ended in the negative, with traditionally defensive staples ending the week strongest, with minimal losses, along with energy; while technology, industrials and materials brought up the rear all losing near or more than -2.5%. The Russell 2000 small cap group actually tipped back into a -10% correction slightly, measured from last summer’s highs.
Foreign stocks in Europe and the U.K. fell in similar fashion to U.S. equities, while Japan fared a bit worse, due to tighter trade relations with China, and emerging markets declined by up to -5%, led by more severe declines in China and South Korea, which are naturally both heavily immersed in the zone of trade tensions. Other regions, such as Latin America, suffered losses on par with developed market equities.
U.S. bonds fared well, as expected, with flows moving away from risk assets, which pushed fixed income prices higher and yields lower. The yield curve is showing a pronounced inversion between the 3 month Treasury bill and 2-5 year note, before turning positive again going out toward 10 to 30 years. This is in keeping with continued higher market probabilities of a downturn in the next several years. For the week, Treasuries fared best, followed by investment-grade corporates up a few basis points, while floating rate and high yield lost up to a half-percent on the week. Foreign bonds performed similarly, with little change in the dollar to move the needle, as developed market treasuries gained ground, while emerging market local and USD-denominated bonds both declined on the week.