Trader's View - Stocks take a spill as trade-war reality bites

Trade-war reality bites

A touch of panic has gripped financial markets. Traders apparently flirted with an optimistic outlook towards the trade-war last week, but judging by price action on the first day of this week, any hope for amiability between the US and China is rapidly diminishing. As was generally presumed, the Chinese announced that they would be retaliating to the Trump administration’s new round of tariffs on their exports with tariffs of their own. Volatility in the market has subsequently spiked, risk assets or those tied to global growth have tumbled, and safety is being sought, for now, wherever it can be found.

US stocks tumble

Having already slumped yesterday in response to news that the White House was considering increasing tariffs on all Chinese goods going in the US, China’s announced retaliation overnight gave market participants all the justification they needed to hit-the-sell-button on stocks. As of the session’s close, the S&P 500 has fallen 2.50%, plunging below the support-level around 2855 that had propped-up the market last week. Telling of the markets’ general sentiment, bellwether information-technology stocks led the losses, falling 3.71%; and tariff-sensitive consumer discretionary stocks tumbled by 2.95%.

Activity high as safety sought

Volume was quite-elevated on the S&P 500, up 17.65% on its 30-day average, while market breadth was abysmal, with around 91% of stocks falling for the session. Credit spreads also blew out, and sit marginally below multi-month highs. Of course, the flow out of equities and corporate credit made its way to safe-haven assets. US Treasury yields tumbled across the curve: the yield on the US 10 Year note dropped just shy of 7 basis points, to currently trade at around 2.40% – only basis points above the US Federal Reserve’s current overnight effective overnight cash rate.

Traders betting on slower global growth

Bets of a rate cut from the Fed also lifted, just as they have for central banks across the globe, and this has driven the rally in government debt in general. It’s indicative of a market preparing for a material slow-down in global economic activity, due to the stifling of international trade flows as a consequence of the new round of US-China tariffs. Bets of a rate-cut before year end from the Fed climbed to a 75% implied probability; while closer to home, traders have recommitted to their bets the RBA will cut rates twice this year, pricing in 45 basis-points of cuts in 2019.

Negative yields spark run to gold

The expectations that the new escalation in the US-China trade-war will drag-on global economic growth and supress global interest rates has sent some government debt further into negative yields. 10 Year German Bund yields have dived to -0.072 per cent overnight, and 10 Year Japanese Government Bond yields have slipped to -0.05%. The return of a market-dynamic characterized by a higher proportion of negatively-yielding debt has resulted in a run-into gold. The yellow metal was a major outperformer overnight, rallying over 1%, to be trading back towards the $US1300-mark for the first time in over a month.

Currency markets the barometer

Other risk-off plays were in vogue overnight too. Funding currencies rallied considerably, while growth-proxies tested new lows. The Japanese Yen was the natural beneficiary of this dynamic, pushing deeper into the 109-handle, as was the Swiss Franc. The US Dollar is very slightly higher, however it’s gains have been tempered by a play into the Euro, following Friday night’s disappointing US CPI figures. Of the laggards, the Kiwi, the Loonie, and Scandi-currencies all fell last night. But it was our AUD, as the growth proxy of choice for global traders, that performed worst of all last night, registering a three-year low of 0.6941.

ASX to feel the pinch

The ASX ought to feel the full brunt of the overnight market-sell off today. SPI Futures are suggesting the index will drop around 55 points at this morning’s open, in what may prove to be a day of heightened anxiety across the Asia. Australian stocks held-up relatively well yesterday, as traders digested the weekend’s news-flow. In fact, if it weren’t for the 22-point loss sustained by the financial sector, the market may well have closed in the green, courtesy of strong activity in real estate and mining stocks. Such luck may be sparing today, as markets prepare for broad-based losses in line with overnight trade.