Hi Everyone,
The stock market finished significantly lower following a volatile and bearish afternoon session, as the diplomatic escalation between the U.S. and China weighed on risk assets. The Dow was down 457 or 1.9%, to 23,765, the Nasdaq lost 190, or 2.1%, to 9,003, while the S&P 500 fell by 60, or 2.1%, to 2,870. Decliners outnumbered advancing issues decliners by a 3-to-1 ratio on the NYSE, where volume was moderate.
Traders said that even though the afternoon selloff wreaked havoc across the key risk-on sectors, technical damage was limited. As one trader explained, “The mighty Nasdaq led the way lower in late trading, with the fears of another tit-for-tat trade war fueling the scary selloff. The tech benchmark only gave back less than two days of its lofty post-crash gains.”
The tension between China and the U.S. continued to rise over the past 24 hours, with the Trump administration blocking investments in Chinese stocks by a government retirement fund. China also banned one-third of its beef imports from Australia due to the country’s position regarding China’s role in the pandemic. Some analysts fear that the trade war could return and even broaden in the coming months. Should the Chinese side announce retaliatory measures in the wake of the U.S. steps, the overnight session could see a surge in volatility.
The U.S. might switch to an even more active strategy ahead of the November elections, and since the COVID-19 crisis and the collapse in global trade deeply hurt China, the pressure on Chinese assets could increase again in the second half of the year. According to the major prediction markets, the two parties are neck and neck in the race for the White House, and given the unprecedented circumstances, we will likely be in for a very active campaign period. The response to the COVID crisis will undoubtedly take center stage, and while the fate of the $3 trillion bill that House Democrats unveiled is uncertain, another round of stimulus seems very likely.
Fed Chair Jerome Powell will give a speech tomorrow morning, and analysts will be interested to hear his take on last week’s moves in the bond market. The implied Fed funds rate fell below zero for the first time ever amid the global economic gloom, and although the market has normalized since then, negative rates have been firmly opposed by the FOMC and Mr. Powell in the past. Should the Chairman be more flexible toward sub-zero rates, we could see tectonic moves in bond markets and the dollar, even though there is little evidence on the effectiveness of such policies.
As always, have a great evening and stay tuned!!!
Joe
