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Posted on May 13, 2019

Weekly Market Commentary May 13, 2019

Market Commentary

The S&P 500 dropped 2.1% last week as optimism that the U.S. and China will reach a trade deal was beaten down by additional tariffs and accusations of backing away from agreed-on compromises. The global MSCI ACWI slid 2.5%. Trade makes up a significant part of the economies of international markets, so the large decline was not surprising. The Bloomberg BarCap Aggregate Bond Index climbed 0.3% as potential economic slowness resulting from less trade allowed interest rates to drop and bond prices to rise.

Key Points for the Week

  • Trade negotiations between the U.S. and China failed to result in a deal last week.
  • Investors are concerned the short-term risk of tariffs and the long-term decline in trade will slow economic growth and pressure margins.
  • Global stocks declined by more than 2%.

The trade negotiations dominated the economic news flow, and other news was relatively quiet. The U.S. trade deficit roughly matched expectations. U.S. inflation, as measured by the Consumer Price Index (CPI), rose 0.3%. Core inflation, which excludes food and energy, rose 0.1% and showed low unemployment is not pushing inflation higher.

 

Trade

The U.S. increased tariffs to 25% on $200 billion in Chinese goods on Friday and threatened more tariffs on all Chinese goods if an agreement cannot be reached. If implemented, nearly all Chinese goods would face a 25% tax. China has not stated what the countermeasure will be, but one is expected. Many believe China will up its tariffs on the U.S. to 25%, too.

The decision came after the Thursday trade discussion with China failed to get the possible agreement back on track. Earlier last week, President Trump claimed China had backtracked on compromises reached earlier this year. The potential trade agreement seems further away than what had been anticipated all year. With an agreement between the world’s two largest economies in doubt, markets turned negative.

If the U.S. and China continue the tit-for-tat tariffs, the U.S. loses less than China. As the chart above shows, China exports $540 billion worth of goods to the U.S., and the U.S. only exports $120 billion worth of goods to China.

A broader view is every country benefits from trade, although China has benefitted more than others. U.S. consumers benefit from low-priced goods. If tariffs were to reach 25% on all goods imported from China, the U.S. consumer will likely see price increases in many consumer goods, such as the iPhone, electronics, and clothing.

An agreement is still likely in the second or third quarter, but this step back portends additional challenges. Those challenges will likely be a source of ongoing volatility for many years. Corporations are big beneficiaries from the scale and costs savings global trade brings to companies, so the disagreement raises risk. The step backward also lowers expectations for how free future trade will be. Even if a deal is signed, the new trade environment will likely have more flare-ups and disagreements between companies.


Fun Story

‘Game of Thrones’ gaffe: Coffee cup left in final cut of episode 4

The wildly popular series Game of Thrones had some inadvertent advertising in one scene of episode four, as what looked like a Starbucks coffee cup was left on the table in front of lead character Daenerys. Subsequent reports indicate it was from a locally owned coffee shop. The gaffe gained quite a bit of popularity after the image was posted to social media, and some even created more images mocking the TV blunder.


 

 

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