Stocks Routed On Shift In Trade War Sentiment

You’re entitled to feel whiplashed today.

Just a few days ago, on May 16, stocks rallied on speculation that trade talks would resume relatively quickly and that the United States and China, rhetoric and tariff increases aside, would find a way within weeks to end their trade war. On May 16 on that optimistic sentiment the Standard & Poor’s 500 closed at 2876.

Today all the sentiment is negative. What passes for optimism today holds that the trade war will stretch on to the November 2020 election. Pessimists are saying that we’re looking for a long-term struggle between the United States and China that could stretch until 2035.

The odds are that this “2035 or bust” sentiment is wildly overstated and that pessimism is swinging to an extreme.

But while sentiment may be about to get too negative in the short term (and consequently will produce an oversold bounce,) I don’t see any likely developments that will shift the longer term trend from down to up.

China is almost certainly going to retaliate for already announced U.S. measures that include higher tariffs on $200 billion in Chinese exports and a ban on purchases of U.S. technology by China’s telecom champion Huawei. Speculation is that China might well use the long memorial Day market holiday in the United States to announce its next move.

And the United States and China are almost certainly going to pursue new trade restrictions. The United States is studying tariffs on an additional $320 billion in Chinese exports and a ban on technology purchases by five Chinese video surveillance companies. China looks to be considering moves against Apple (AAPLWealth Strength IndexAAPL is Moderately Flat and trending Up) and possible export restrictions on rare earth minerals used in electric cars and LEDs.

With that as backdrop and a long market holiday looming ahead, investors and traders have sold everything that smacked of risk today. As of 1 p.m. the Standard & Poor’s 500 was down 1.68% and the Dow Jones Industrial Average was lower by 1.69%. The NASDAQ Composite index fell by 2.01% and the Russell 2000 small cap index dropped by 2.06%

The CBOE S&P 500 Volatility Index (VIX), climbed 20.54% to 17.78.

Everything China fell with Chinese stocks such as JDWealth Strength IndexJD is Flat and trending (JDWealth Strength IndexJD is Flat and trending Up) ad Tencent Holding (TCEHY) down 4.73% and 3.72%, respectively. U.S. stocks in any way connected with China sold off with Caterpillar (CAT) down 1.17% and Deere (DE) down 2.01%. Tapestry (TPR), which sells its leather goods into China, dropped 2.24%

Other U.S. stocks fell just because they are seen as more risky. Twilio (TWLO) was down 4.12%. Apple was off 2.08%.

The Financial Select Sector SPDR ETF (XLF) was down 2.64% on the drop in yields to touch the important $26.49 level. The Technology Select Sector SPDR ETF (XLK) was lower by 2.33%.

The yield on the 10-year U.S. Treasury dropped another 6 basis points to 2.3256%, the lowest yield since 2017. Gold rose to $1284 an ounce, up 0.77%.