May 13, 2019 / 2:48 PM / a month ago

Wall Street hit hard by escalation of tariff war

NEW YORK (Reuters) - Wall Street’s main indexes tumbled on Monday after Beijing announced plans to retaliate with higher tariffs on U.S. goods, raising fears that another round of tit-for-tat measures could push the U.S. economy toward recession.

Traders work on the floor at the New York Stock Exchange (NYSE) in New York, U.S., May 13, 2019. REUTERS/Brendan McDermid

U.S. Treasury yields fell to six-week lows as investors piled into low-risk assets.

The Dow Jones Industrial Average fell 560.03 points, or 2.16%, to 25,382.34, the S&P 500 lost 61.84 points, or 2.15%, to 2,819.56 and the Nasdaq Composite dropped 222.72 points, or 2.81%, to 7,694.22.

PAUL MENDELSOHN, CHIEF INVESTMENT STRATEGIST, WINDHAM FINANCIAL SERVICES, CHARLOTTE, VERMONT

“The market thought it was positioning and at the end of the day there would be a deal and that over the weekend they would work things out and that is clearly not the way this thing is going. You are at a critical support point at 2,815 on the S&P 500, that was your breakout point to the move towards this new high, towards this double top. You are right down in that area where you have to hold it. We are going to blow a couple of things out in terms of repositioning.”

“ The Chinese are measured in their response and as long as they stay measured in their response that is good. Then you have other issues – are they going to let their currency float, are they going to boycott Treasury auctions or sell Treasuries? You are heading into, I wouldn’t say uncharted territory because unfortunately we have been here before in the 1930’s so we know where this can go to. This can get really ugly and dangerous very, very quickly. Then you have the Fed on the other side who you have to take into account – your yield curve is disintegrating in here today. So the Fed has to be paying attention to what is going on and say ok we have a crisis going on here on the same par as 2008 and we need to respond to this ahead of time instead of making the mistake we made in 2008 of waiting too long.”

MICHAEL O’ROURKE, CHIEF MARKET STRATEGIST, JONESTRADING, GREENWICH, CONNECTICUT

    “The market’s realizing that this was an absolute breakdown of talks and everything has gone backwards to the point that we’re going to be looking at putting tariffs on another $300 billion of Chinese goods and China is putting tariffs on U.S. goods.”

    “The market is starting to realize the situation is as bad as it could be. The body language from the U.S. government Friday didn’t indicate that. That’s why the reaction is different today.”

    “Bonds are rallying pretty nicely today. I wouldn’t be surprised if some people are raising cash too. People are selling riskier assets, rotating out of equities into treasuries and cash.”

    “It could be very bad. There’s a lot of uncertainty. This should lead to further slowing in the economy.”

“It should be more damaging to corporate profits than GDP … U.S. multinationals stand to lose significantly. It’s not good for the economy but that’s where the pain’s going to be felt first.”

IAN LYNGEN, HEAD OF U.S. RATES STRATEGY, BMO CAPITAL MARKETS, NEW YORK 

“Today’s trade has unmistakably been about China’s response to the most recent round of tariffs. Risk-off with a flight-to-quality chaser is the non-brainer. How low can yields go just became the operative question and for this we’ve been tracking local extremes for initial resistance levels.”

WILLIE DELWICHE, INVESTMENT STRATEGIST, BAIRD, MILWAUKEE

“I think the sell-off is a reflection that trade talks are in worse shape than people were expecting. Entering trade talks on Friday afternoon, there were thoughts that maybe it wasn’t as dire a situation and maybe there would be further communication. I think the news over the weekend, shows that there’s less common ground than people were thinking and now markets have to figure that into their assumptions

    “The global uncertainty is the big concern, there were some hopes that the global economy was finding its footing, but an escalation in trade concerns is going to weigh on that and you have that with a backdrop of increased optimism and a rally that was getting kind of narrow and now you have some disappointing news that leaves stocks vulnerable.”

    “Bonds have been attracting inflows, and investors have also been moving to cash to some extent, those are the risk-off reactions that we tend to get.”

ALEC YOUNG, MANAGING DIRECTOR OF GLOBAL MARKETS RESEARCH, FTSE RUSSELL, NEW YORK

“The recent escalation in US-China trade tensions is taking a worsening toll on stocks as rising retaliatory tariffs risk sparking a full-blown trade war. Investors are increasingly worried an anticipated second-half profit rebound may now evaporate as President Trump’s threat to tariff the remaining $325 billion in Chinese imports would disproportionately target consumer products like iPhones, thereby posing a greater threat to the consumption-driven US economy.

“On the heels of 2019’s historic rally, valuations are no longer depressed, making it harder for equities to shrug off looming macro risks. With the ultimate trade outcome inherently uncertain and difficult to model or predict, investors are selling first and asking questions later. More globally exposed, cyclical industries like technology and industrials are proving most vulnerable.”

KRISTINA HOOPER, CHIEF GLOBAL MARKET STRATEGIST, INVESCO, NEW YORK

    “It’s clear that there is a lot of nervousness around the U.S.-China trade negotiations and concern that it’s really deteriorating pretty significantly and that’s impacting all areas of markets.”

    “We also have a pretty significant flight to safety in the form of U.S. Treasuries.”

    “Investors have wanted to believe the best. They have hoped for the best and wanted to believe the best. So they hold onto any small sign of better relations between U.S. and China. The characterization of last week’s negotiations as being, I think the term was ‘candid and constructive,’ many investors held onto. The idea that China even came to the table after tariffs were applied I think investors saw as a positive sign. But the reality is the Chinese delegation left early. The reality is that while trade talks are expected to resume in Beijing, no date has been set and that should tell us a lot about how strained relations are. And then of course, this morning, China finally retaliated with its own set of tariffs on U.S. goods. So clearly this relationship is deteriorating. It’s not what investors had hoped it was on Friday.”

Compiled by Alden Bentley

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