In the on again-off again discussion about the menacing specter of a trade war, things are on again this morning after the White House said it will be imposing a 25% tariff on a list of imported Chinese goods worth about $50 billion. What's more is that there was a threat that more goods will face a tariff if China retaliates with reciprocal tariff action.
China has reportedly said it will retaliate and it also said previously that any prior agreements on trade will be called off if the U.S. pressed ahead with imposing new tariffs on Chinese goods.
It's hard to know if this is just a big game of political chicken that will get resolved without anyone getting permanently hurt or if it is the start of something bigger that will create some real economic damage.
The futures market has taken an unsurprising step lower on the news, yet it's a long way from falling off a cliff considering the S&P futures are down 15 points and are trading just 0.5% below fair value.
The Nasdaq 100 futures are down 38 points and the Dow Jones Industrial Average futures are down 202 points.
Clearly, then, the cash market is poised to start this quarterly options expiration day on a downbeat note.
One can't help but wonder, though, if the trade headline is simply acting as an excuse to take some money off the table following a hot run for the market that has left the S&P 500 flirting with a notable technical resistance level at the 2800 level.
After all, there have been reports all week suggesting the White House was headed toward this tariff action, and yet the S&P 500 enters today's trading up 0.1% for the week and up 5.4% for the quarter. That's not the standing of a market that is living in true fear of a trade war.
Call it the standing of a market that ultimately expects a daisy to be stuck in the barrel of the trade gun. If that expectation gets shot down, though, this market will, too, as more pressing concerns about growth, inflation, and earnings prospects tied to a trade war would manifest themselves in lower stock prices.
For now, this latest tariff development is a negative development detracting from the buying interest that has carried the S&P 500 9.0% higher from its April 2 low.
In other developments, AT&T (T) closed on its acquisition of Time Warner (TWX), Adobe Systems (ADBE), Jabil Circuit (JBL), and Canada Goose (GOOS) all topped earnings expectations, and the Bank of Japan left its key policy rate unchanged at -0.1%, as expected.
The Bank of Japan also lowered its inflation outlook, which was another telltale reminder that the Bank of Japan and the Federal Reserve are on much different policy glide paths that will foster the continuation of interest-rate differential trades that are helping to suppress the rise in long-term rates in the U.S.
Those trades were certainly in play yesterday following the ECB announcement that it expects to keep its key policy rates unchanged at least through the summer of 2019 and beyond if necessary. For some added perspective on this matter, be sure to visit The Bond Column page.
The yield on the 10-yr note is down five basis points to 2.90% even though the Empire State Manufacturing Survey was stronger than expected, checking in at 25.0 for June (Briefing.com consensus 20.0) versus 20.1 in May. The Industrial production Report for May (Briefing.com consensus +0.2%; Prior +0.7%) will be released at 9:15 a.m ET.
The move lower in long-term rates and a flattening yield curve are expected to keep pressure on the S&P financial sector, which has dropped 1.9% this week and 0.2% this quarter.
That weakness has been a headwind for the broader market, which has seen its progress slowed this year by the on again-off again concerns surrounding a litany of key considerations that include the direction of trade discussions, interest rates, oil prices, and earnings estimates to name a few.