There is a nasty tone in the futures market this morning, because there is a nasty tone in the headlines this morning on matters pertaining to trade between the U.S. and China.
Currently, the S&P futures are down 56 points and are trading 1.8% below fair value. The Nasdaq 100 futures are down 195 points and are trading 2.4 % below fair value. The Dow Jones Industrial Average futures are down 507 points and are 1.9% below fair value.
It has been a battle of tweets that have the market thinking the risk of a prolonged trade war is increasing.
President Trump had this to say:
"I say openly to President Xi & all of my many friends in China that China will be hurt very badly if you don’t make a deal because companies will be forced to leave China for other countries. Too expensive to buy in China. You had a great deal, almost completed, & you backed out!"
The editor of China Global Times had this to say:
"China may stop purchasing US agricultural products and energy, reduce Boeing (BA) orders and restrict US service trade with China. Many Chinese scholars are discussing the possibility of dumping US Treasuries and how to do it specifically."
Meanwhile, in the non-tweet world, China had this to say:
China will raise the existing $60 bln tariff tranche rate to a floating range of 5-25% from a floating range of 5-10%, effective June 1.
There is a lot of tension on the trade line right now, because both sides are defending their national pride - and that kind of pride isn't swallowed easily. We touched on that point, and the risk involved with it, in the latest installment of The Big Picture.
The big picture this morning, however, is that there is a lot of uncertainty that is undercutting investor sentiment. We've been down this road before of course and the market has shown some impressive resilience.
It might do so again today, yet it is facing a stronger headwind this time as China is drawing its own red lines for a deal to get done, seemingly confident in its ability to weather any tariff storm triggered by the U.S.
The trade factor is the principal factor behind this morning's de-risking. Concerns that the EU might be forced to deal with higher U.S. tariffs on imports of cars and auto parts is simply adding fuel to the fire.
Beyond that, geopolitical angst is in the defensive mix, as press reports indicate two Saudi Arabian oil tankers were attacked near the Strait of Hormuz. There has been no confirmation of who carried out the attack, yet the speculation that Iran could have played some part in it has the market a bit on edge.
Oil prices ($62.63, +$0.97, +1.5%) are up, yet the trade standoff between the U.S. and China is fostering larger concerns about global economic growth and slowing demand.
That is apt to translate into relative weakness for the cyclical sectors in the early going, yet the tape will likely have a familiar trade-sensitive feel to it, which includes the underperformance of the semiconductor stocks, leading industrial names like Boeing (BA) and Caterpillar (CAT), and companies like Apple (AAPL), which many think could end up in retaliatory crossfire.