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Market Weekly Review: Global Trade Talks Drive Volatile Action

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The ongoing trade dispute with China frightened U.S. investors again this week. When China retaliated with increased tariffs on $60 billion of U.S. goods, the Dow Jones Industrial Average fell 617 points on Monday. However, U.S. markets were able to claw back a majority of those losses by Friday’s close.

While no resolution has been made between the two superpowers, the war of words has since quieted down. In addition, investors cheered solid earnings reports from blue-chips, like Cisco Systems (CSCO) and Wal-Mart (WMT).

Calculating the Tariff Cost

Still, President Trump has vowed to consider tariffs on another $300 billion of Chinese goods next month, if the two countries don’t agree to a truce.

Here’s how Wall Street is envisioning the next steps in the process, which suggests we may not be out of the woods yet:

Deutsche Bank (May 16)- “We continue to see 60% probability that the two sides cannot reach a deal before G20, and the US will impose tariff on the remaining USD300bn Chinese exports to the US. It seems to us the war is indeed spreading beyond tariff.”

Barclays (May 17)- “We maintain our base case S&P 500 price target of 2750; however, in the event of an all-out trade war, we estimate further downside of ~10% is possible.”

The tariffs being slung back and forth across the Pacific Ocean challenge each company differently, but there are other ways the trade conflict is affecting investors. For one, the U.S. yield curve inverted again this week; with the rate of 3-month treasury bills falling below that of 10-year notes.

The perception of slower global growth has also caused Fed funds futures to now price in a 50% chance the FOMC will lower interest rates at the September meeting, up from a probability of just 21% a month ago.

Retail Earnings on Deck

While the first-quarter earnings season is behind us, many retailers report on a different schedule and highlight the reporting calendar next week. Home Depot (HD) and TJX (TJX) kick things off on Tuesday, followed by Lowe’s (LOW) and Target (TGT) on Wednesday.

Investors will certainly be keeping an ear out to see how these companies say they’re being affected by the tariff battle with China, given the amount of consumer goods imported by the U.S.

U.S. markets survived a double dose of dangerous headlines this week, in the form of China tariffs and an inverted yield curve. Some investors are betting that the FOMC could serve as a backstop and lower interest rates in a pinch, but the CBOE Volatility Index (VIX) has regularly moved 10% (or more) daily, since the beginning of May.

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