Stocks tumble as trade tensions escalate

Summary:

• Rising trade tensions send US stocks to 2 ½ month lows

• Will we see a Trump put?

• Gold rallies in risk-off trade while Oil plunges

There’s been further weakness seen in equities this morning as global stock markets appear to be finally waking up to the elephant in the room that is the renewed escalation of tensions on the trade front.

Mexico and UK face Trump’s wrath

With Trump threatening to slap tariffs on all US imports from Mexico unless it steps up efforts to stop illegal migration, it is becoming ever more apparent that the US president sees tariffs as a valuable geopolitical bargaining chip that he is more than willing to throw around in pursuit of his goal.

The US president has also ramped up his attack on Huawei by promising to limit intelligence sharing with Britain if the UK allows the firm to build part of its 5G mobile network and hopes for a swift resolution to the US-China trade tensions are fading fast. Markets have been relatively sanguine to the latest developments on the trade front, but the growing realisation that this isn’t simply a posturing tactic, intended to get a better deal when an agreement is reached is causing rising concern for investors.

Will we see a Trump put?

The predilection for Fed chairs to step in after stock market declines in recent years has seen the creation of the so-called Bernanke/Yellen/Powell put, with the most recent instance being the incumbent performing a dramatic U-turn on future policy at the start of the year in a move which went a long way to ending the stock market rout seen in the final quarter of 2018.

Given his propensity for championing the stock market as a gauge of the administration's economic policy when it’s rallying and also reports that last year’s plunge caused great concern to Trump, it would not be at all surprising if an adverse market reaction causes him to change tack and back down. The question is where would the hypothetical strike on this put be - or in plain English, how far would stocks have to fall before Trump backs down.

What level would the strike be?

The S&P500 is called to open this afternoon around 7% from the all-time high seen at the end of April, and it took a roughly 10% drop at the back-end of last year for Trump to soften his stance, when he agreed to postpone additional tariffs on China after a meeting with Xi in Buenos Aires. A further 3% decline for the S&P500 would see the market trade down to the mid 2660s.

However, this belief raises two important further questions; firstly, will history repeat or could Trump prioritise taking a hardline with two countries he has constantly billed as rivals in an attempt to enhance his re-election prospects over stock market performance? And two, even if he does soften his stance would it be enough? After postponing the additional tariffs last December the market still continued lower and fell an additional 10% from peak-to-trough to record a total a fall in excess of 20%.   

A decline of around 10% for US stocks caused Trump to soften his stance on the trade front last year. Would a 10% decline this time around cause a similar move? And, if so will it be enough to halt the fall? Source: xStation

Two other markets to watch:

Gold

Gold has rallied to a 2-week high this morning as stock markets tumble. Increased risk aversion, rising expectations for Fed rate cuts and the potential inflationary impacts of US tariffs could provide a potent cocktail for the precious metal going forward. Price has just broken out above a falling trendline dating back to February.

Oil

Brent crude oil could be following a similar pattern to last October where the market’s rally fizzled out when potential supply disruptions failed to materialise, before rising trade tensions caused demand-side concerns and price fell strongly. The market is back below the Ichimoku cloud on D1. Source: xStation