“Bad Trump” is back.
Investors who thought concerns about trade, particularly U.S.-China tensions, were fading into the background got a wake-up call after President Donald Trump expressed unhappiness with the state of negotiations Tuesday afternoon, while also casting doubt on whether a planned summit with North Korea leader Kim Jong Un will happen. Also, Trump is weighing trade measures that would cut European Union steel and aluminum exports to the U.S. by about 10%, a sign the bloc’s efforts to secure tariff exemptions aren’t satisfying the White House.
Wall Street isn’t suffering too much Wednesday morning, but the remarks were seen contributing to a “risk off” reaction that sent Asian and European equities sharply lower while stoking demand for traditional haven assets, including the Japanese yen, the Swiss franc, U.S. Treasurys and even beleaguered gold.
Because both the U.S.-China trade spat and the North Korea issue are more sensitive to Asia, the fact that Asian markets took it on the chin underlines that trade worries were the catalyst for Wednesday’s moves, said Adam Sarhan, founder of 50 Park Investments.
Add in a meltdown for the Turkish lira and the stage was set for a “slightly overbought market” in the U.S. to give back some gains after a nearly three-week rally, Sarhan said.
“We’re seeing a shift in global sentiment back to a risk off environment, meaning fear is picking up because a few of these pieces are becoming unwound,” he said, in an interview. “In other words, the rally over the last three weeks in stocks was largely predicated on the fact that the China trade war threat was easing.”
The initial reaction in U.S. stocks after the remarks wasn’t overly dramatic, with major indexes holding near unchanged. The air came out of the market ahead of the closing bell, with stocks slumping to end at session lows. The real turmoil came in Asian trading hours, with major Asian equity indexes selling off sharply, leaving Japan’s Nikkei 225 Index
down 1.2%, while the Shanghai
dropped 1.4% and Hong Kong’s Hang Seng
U.S. stocks joined in, opening lower. Major indexes remain in negative territory, but off early lows, with the S&P 500
off 0.4%, while the Dow Jones Industrial Average
For investors, the action revives a focus on “good Trump” versus “bad Trump.” In 2017, the market trope goes, investors cheered “good Trump,” who didn’t act on campaign rhetoric on trade, instead emphasizing tax cuts and deregulation. In 2018, the focus was back on “bad Trump” as the White House moved to impose sweeping tariffs on allies and antagonists alike while also moving to exit from the multilateral treaty designed to limit Iran’s nuclear ambitions. That was tempered, however, by a cooling of tensions with North Korea, including plans for a June summit.
Moreover, the incident underlines uncertainty, with Trump’s dissatisfaction on the China trade front coming just two days after Treasury Secretary Steven Mnuchin calmed investors by declaring that Washington and Beijing had put a trade war “on hold” as both agreed to delay imposing threatened tariffs.
It was the stock market rally that followed Mnuchin’s comments that might have been the overreaction, said Steven Ricchiuto, U.S. chief economist at Mizuho Securities USA.
Reducing its trade surplus with the U.S. isn’t consistent with China’s long-term plans, he said, while Trump remains unlikely to back down on intellectual property issues that directly conflict with China’s industrial policies, Ricchiuto said, in a note.
“As such, we continue to focus on the adverse combination of rising rates, a firming dollar and rising energy prices, which we believe argue for a continued shallow recovery and an equity market that continues to experience a shrinking multiple,” he said.
Sarhan said investors should keep watch on the 50-day moving averages as important near-term support levels for the major indexes. The S&P 500’s 50-day average stood at 2,674.26 on Wednesday, according to FactSet. The average, which serves as a marker for short-term momentum and trend changes, had previously served as resistance before the upside breakout that began earlier this month.
So far, the stock market’s retreat looks like a “normal and healthy pullback,” he said. If it intensifies, however, it will raise questions as to whether recent gains were merely a bounce from oversold levels.
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