Technology stocks led the S&P 500 and the Nasdaq higher on Tuesday, with U.S. stocks reclaiming ground lost to Monday’s steep sell-off as investors took heart from a tonal shift in ongoing U.S. trade negotiations with China.

All three major U.S. indexes were in the black, recovering some ground from their worst one-day percentage losses in months. The bellwether S&P 500 was hovering more than 3% below its most recent all-time high reached two weeks ago.

Investors’ nerves were calmed after U.S. President Donald Trump referred to the escalating trade war with China as “a little squabble,” adding that “we have a good dialogue going.”

Beijing echoed that sentiment, with a Chinese Foreign Ministry spokesman telling reporters: “My understanding is that China and the United States have agreed to continue pursuing relevant discussions.”

“Either this is a bargain-hunting rally or a dead cat bounce, or there is some consensus that something meaningful is going to come out of the trade talks in the next four to six weeks,” said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama.

But Hellwig also feels the rollercoaster of the escalating trade war has had an effect on investor psychology.

“I’m starting to see some investors becoming anesthetized on the negotiations and focusing on what the market’s going to look like a year from now,” Hellwig added.

Boeing Co provided the biggest boost to the Dow, rising 2.1% as tariff-sensitive industrials buoyed the blue chip index.

Ralph Lauren Corp dropped 3.8% after the apparel company posted quarterly results.

Uber Technologies and ride-hailing peer Lyft Inc were both trading higher, reversing course after their post-debut slides. Their stocks were up 1.7% and 5.5%, respectively.

Walt Disney Co announced it would take control of Comcast Corp’s Hulu in a move to challenge Netflix and others in the global video streaming war.

Disney stock climbed 2.0%, while Comcast gained 2.4%. Netflix shares were up slightly.

The Dow Jones Industrial Average rose 344.71 points, or 1.36%, to 25,669.7, the S&P 500 gained 39.29 points, or 1.40%, to 2,851.16 and the Nasdaq Composite added 124.25 points, or 1.62%, to 7,771.27.

Of the 11 major sectors of the S&P 500, all but utilities were in the black. Technology stocks had the largest percentage gains, climbing 2.1%.

Chipmakers enjoyed a reprieve, with the Philadelphia SE Semiconductor Index rising 2.7% after suffering its worst one-day percentage loss since Jan. 3.

First quarter earnings season is winding down, with 453 of S&P 500 companies having reported, 75.3% of which beat analyst expectations, slightly below the 76% beat rate for the last four quarters.

Advancing issues outnumbered declining ones on the NYSE by a 3.70-to-1 ratio; on Nasdaq, a 2.74-to-1 ratio favored advancers. The S&P 500 posted 23 new 52-week highs and 6 new lows; the Nasdaq Composite recorded 41 new highs and 79 new lows.
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With the Trump administration locked in an escalating trade war with China, much of the media focus is on the immediate impact of decisions by leaders on both sides to impose sharp tariffs on goods flowing between the two countries. But while consumers and exporters in both countries will suffer in the near-term, an even more disruptive possibility looms in the long term: a “decoupling” of two massive economic systems that have become deeply interdependent over the past several decades.

At the root of the dispute is a U.S. effort to force China to bring its trade policies in line with other major industrialized countries.

Specifically, the U.S. wants to see China stop subsidizing domestic firms to help them compete on the world stage, eliminate the widespread theft of intellectual property by Chinese businesses, and open its markets to foreign competition.

The U.S. is also putting pressure on specific Chinese telecommunications firms, out of concern that they could be used by the Chinese government to spy on global rivals.

In recent days, the two countries have both ratcheted up economic pressures. As negotiations over a major trade deal stalled last week, President Trump announced that he would direct his administration to hike tariffs to 25% on Chinese goods that accounted for $200 billion in imports last year.

He indicated that he would eventually move to place that same levy on all $540 billion of annual Chinese imports. The Chinese government retaliated Monday with the imposition of tariffs on $60 billion worth of U.S. goods that flow into its country, and indicated that it will take more drastic steps if necessary.

While many experts believe that the two countries will strike a deal before the new tariffs really start to bite, there is increasing concern that strife between the world’s two largest economic powers could persist, forcing a disruptive overhaul of global supply chains that would echo around the world.

In fact, there is evidence that companies are already taking the first steps in a significant reorientation of global supply chains.

According to Paul Triolo, practice head for Geo-Technology at the Eurasia Group, there already has been a significant amount of decoupling by companies in the information and communications technology industries, as well as furniture, apparel, and agricultural products.

“US technology companies are already withholding new investment in manufacturing facilities based in China, and shifting parts of supply chains as feasible to southeast Asia and beyond,” he said in an interview. “There is a spectrum of potential options here, and so far most of the ‘easy’ stuff has been moved. The equation becomes much more complicated for things like advanced electronics.”

Understanding why this would be so disruptive requires digging below the surface of most discussions of US-China trade.

Political rhetoric about trade, much of it originating in President Trump’s Twitter feed, tends to oversimplify — and frequently misrepresent — the reality of global trade flows. The exchange of goods between the two countries is portrayed as a zero-sum game, in which U.S. consumers face a simple choice between buying widgets manufactured in China and buying competing products manufactured in the U.S.

Bilateral trade, intermediate goods

The truth is far more complex. Combined exports and imports between the two countries totaled $650 billion in 2018, according to U.S. government figures. Goods moving from China to the U.S. make up just under two-thirds of that total, and they are not limited to the cheap clothes and toys that made up a large portion of Chinese exports a generation ago. Smartphones, appliances, computers and other goods travel in a constant stream across the Pacific to U.S. markets.

Importantly, though, those finished goods often contain key elements, like microchips, that were originally manufactured in the U.S. and exported to China. These “intermediate goods” represent a huge market for U.S. technology firms.

Similarly, intermediate goods made in China find their way into finished products that bear the “Made in the U.S.A.” stamp. As a whole, intermediate goods make up between 60% and 65% of all global trade flows, which further illustrates the complexity of worldwide supply chains.

Restructuring supply chains

These complex manufacturing relationships have grown up over decades, and are very much baked into the way companies in both countries do business. Now, as the trade war escalates, they are facing the real possibility that ongoing conflict between Washington and Beijing could require companies to restructure global supply chains in a way that will provide more certainty and stability in the future.

But doing so would be a long and difficult process, experts warn.

“These value chains, or supply networks are both highly specialized and quite idiosyncratic,” said Scott Miller, a senior adviser to the Center for Strategic and International Studies’ Abshire-Inamori Leadership Academy said in an interview. “Company A and Company B might be in the same business, but the way they organize their supply network could be quite different.”

“The idea of ‘decoupling,’ well, if you’re in a business that requires assembly at scale, you’re going to find it hard replacing China,” Miller said. “It can be done, but it’s real work.” The problem is even worse if a company has developed a network of qualified suppliers in China. Replacing them is not like flipping a switch, he said. “It takes time, energy and capital to develop suppliers,” Miller said.

Should it come to that, economists warn, the effects on both countries, at both the macro- and microeconomic levels, could be immense.

Cost of tariffs

Within the U.S. alone, the potential damage from the proposed tariffs would be huge, warned Ian Shepherdson, chief economist at Pantheon Macroeconomics.

Writing in a note to investors on Wednesday, he said, “The hit from 25% tariffs on all imports would be at least 0.6% of GDP, and probably much more as companies would have to rebuild entire supply chains. The hit to earnings growth would be of the order of 10%.”

It is also apparent that many of the supposed benefits of decoupling won’t necessarily accrue to the United States. President Trump has suggested that his trade policies will bring manufacturing jobs back to the U.S., but by all indications, the manufacturers who are already starting to move away from China are relocating to other low-wage countries, like Vietnam and Mexico.

As grim as some of these predictions are, there is a school of thought in which the divisions between the U.S. and China, and their global impacts, become much, much worse.

Worst scenario

In an appearance on the television program Face the Nation on Sunday, former U.S. Treasury Secretary Henry Paulson warned that if China and the U.S. successfully isolate themselves from one another — particularly in the realm of technology — the result could be a bifurcated global system that will devastate economic relationships.

“The real risk is that both countries through their actions will throw up or create an economic iron wall which means we’ll be decoupling global supply chains, right?” said Paulson, who also served as CEO of the investment bank Goldman Sachs.

“We’ll be having two systems with incompatible standards and rules,” he added. “And so as I look at it the defining strength of America is innovation and we need to protect our technology, need to protect our innovation. But if we close ourselves off from other, you know, other innovative economies and entrepreneurs, we jeopardize our leadership position in the world and we’re much less attractive as a destination for foreign investment.”

Triolo, of the Eurasia Group, gave voice to a concern that fewer commentators are willing to discuss out loud, but which must lurk in the back of many business leaders’ minds.

“Many companies are now for the first time factoring in the potential for the trade and tech conflict to morph into a real shooting conflict, either by accident or miscalculation or deliberately,” he said. “The potential for actual conflict has now gone way up for the period 3-5 years out, and this has to be taken into account when multinationals are looking at global supply chain risk.

“The best case scenario, a trade truce with China making some limited concessions, will not necessarily improve this dynamic,” he said. “U.S. focus on the nature of China’s political system, the control of the Party over information, [Chinese President] Xi’s unwillingness to cede more state control of the economy, etc. are all contributing to the ‘clash of civilizations’ meme which is gaining traction among the extreme factions on each side, diminishing the room for rebuilding trust, which is now arguably at an all time low.”
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U.S. President Donald Trump on Monday said U.S. tariffs on China bring billions of dollars into U.S. coffers. He said China’s retaliatory tariffs can have no effect on the U.S. economy. The escalation of the U.S.-China trade war sent stock markets tumbling on Monday, with the Dow Jones Industrial Average falling more than 600 points. Earlier, China announced new tariffs of up to 25 percent on $60 billion worth of U.S. goods, starting June 1. VOA’s Zlatica Hoke has more.
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As Washington and Beijing impose ever-higher tariffs, prompting financial markets to falter, U.S. lawmakers are expressing hope for a swift but comprehensive resolution of America’s deepening trade disputes with China. 

Unease prevailed on Capitol Hill after China retaliated against a new round of American tariffs by hiking duties on U.S.-made goods. Even so, senators of both parties say China must be confronted. 

“We need to challenge China to change a lot of its trade practices and its domestic business practices.”said Maryland Democrat Chris Van Hollen. “For example, they’ve been stealing U.S. (technological) secrets for a long time.”

But Van Hollen faults President Donald Trump’s focus on tariffs.

“What I see is a tariff-only strategy. I don’t see a more comprehensive strategy towards China,” Van Hollen said. “American consumers are paying more and more by the day. It’s not all about how many sales they (Chinese producers) are making and how many sales the United States is making to China.”

 

Among the most vocal about trade war concerns are American farmers. Republican Senator Roy Blunt represents agriculture-rich Missouri.

“We (Missouri farmers) were selling about one out of every four rows of soybeans just to China,” Blunt said. “Soybeans, corn, livestock  that’s a great market that’s being disrupted.”

But Blunt believes Americans understand that short-term economic pain is necessary to secure better trading terms with China.

“If there’s a trade fight worth having, it’s the trade fight with China,” Blunt said. “They have not been fair traders.”

While the U.S.-China dispute is grabbing most headlines, Blunt also urged Congress’ swift consideration of a new U.S.-Canada-Mexico free trade pact.
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A drop in the consumer outlook for inflation and intensifying trade tensions drew caution from Federal Reserve officials on Monday as policymakers faced fresh market volatility and a renewed set of risks.

While Fed officials have largely discounted the trade war so far as unlikely to derail the U.S. economic expansion, officials emphasized Monday that a protracted tit-for-tat battle between the United States and China was a different matter that might require a Fed response.

“If the impact of the tariffs — and whatever financial market reaction to those tariffs is — causes more of a slowdown, then we do have the tools available to us, including lower interest rates,” Boston Fed President Eric Rosengren, a voter this year on Fed rate policy, said in an interview with Reuters.

While Rosengren said he was “not necessarily” expecting a rate cut to be necessary, the market sell-off Monday was deep and potentially disruptive to the Fed’s core expectation that interest rates will remain on hold for some time to come.

Major U.S. equity markets were down between 2% and 3.5% on Monday, while bond investors sharply increased their bets that the Fed would be forced to cut rates this year. A closely watched spread between long- and short-term bonds turned negative, seen by some officials as a sign of weakened market confidence in the economic outlook.

After the collapse of U.S.-China talks last week and the threat of tariffs ratcheting ever higher, there was more reason to believe the tensions will last a while.

“If it’s the worst-case scenario and it’s ever-increasing tariffs for an extended period of time, that could change things, that could have a real effect on U.S. GDP growth,” Minneapolis Fed President Neel Kashkari said on CNBC. Traders and analysts on Monday said the volatility is likely to continue.

“You cannot game what two leaders … are going to do from day to day,” said Anthony Saglimbene, global market strategist with Ameriprise Financial Services in Troy, Michigan, of the high-stakes standoff between Trump and Chinese President Xi Jinping.

Rate cuts back on radar 

Fed officials have been careful to say that nothing yet has changed their core outlook, which envisions rates to be held in their current range of between 2.25% and 2.5% until either growth demonstrably weakens and inflation falls further, justifying a rate cut, or faster inflation makes higher rates warranted.

As the trade war intensified over the last few days, however, traders in the federal funds futures market have moved decisively in favor of expecting a Fed rate cut in coming months. 

Data from the CME Group now sees the Fed cutting rates in October, with a near 10 percentage point shift since Friday in the probability of a rate reduction at that Fed meeting. The pressure on the Fed could come from several directions.

Economic growth overall could slow if the tariff wars continue and global trade declines; “wealth effects” could directly impact business and household confidence and spending if the stock declines continue; higher costs could hit company profits, and discourage hiring.

A further complication for the Fed: The inflation outlook among U.S. consumers dipped sharply in April, countering Fed policymaker hopes that inflation dynamics will improve and the pace of price increases soon rise toward their target level.

Survey data released by the New York Federal Reserve on Monday showed consumer expectations of the inflation rate over the next year fell to 2.6% from 2.82% in the March survey.

The nearly quarter point drop was the third-largest since the survey was launched in mid-2013. The outlook for inflation over the next three years also fell, to 2.69% from 2.86%, evidence that medium-term expectations have also weakened in recent weeks.

Following the Fed’s most recent meeting, Chairman Jerome Powell and others said they felt recent weak inflation readings were driven by “transitory” factors that would disappear over time and allow overall inflation to rise.

But a drop in inflation expectations is another matter, and could be evidence that households and businesses are losing faith in the Fed’s ability to deliver on its inflation goal — a worrying development for central bankers who feel their ability to keep expectations set around their inflation target is critical to meeting the goal.

As of the Fed’s last policy statement on May 1, officials said they felt expectations remained stable.

While consumer surveys are discounted by some officials as overly influenced by things like changes in gasoline prices and other costs that consumers closely monitor, some broader market expectation measures have also shifted.

Since late April, for example, a St. Louis Federal Reserve measure of the inflation rate expected five years from now, based on trading in different types of bonds, dipped to 1.9% from 2.1%, a sign traders also see weaker inflation ahead.
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The Dow Jones Industrial Average plunged more than 500 points Monday as investors sought shelter from an escalating trade war between the U.S. and China.

The Dow and S&P 500 index each fell more than 2% as investors sold trade-sensitive shares in a broad sell-off that extended the market’s slide into a second week.

Technology stocks led the way lower, with digital storage companies and chipmakers among the big decliners. Heavy equipment makers Deere and Caterpillar drove losses in the industrial sector.

The world’s largest economies had seemed on track to resolve the ongoing trade dispute that has raised prices for consumers and pinched corporate profit margins. Investor confidence that the two sides were close to a resolution had helped push the market to its best yearly start in decades.

Those hopes are now being dashed and replaced by concerns that the trade war could crimp what is otherwise a mostly healthy economy. Analysts have warned that failed trade talks and the deterioration in relations will put a dent in the U.S. and China’s economic prospects.

“The larger issue with the tariffs isn’t the specific amounts of tariffs at any given time, but the uncertainty that’s surrounding these tariffs and the `what’s-next?’ of an escalating trade war,” said Willie Delwiche, investment strategist at Baird. “That weighs on the global economy and could then weigh on the U.S. economy.”

The Dow dove 544 points, or 2.1%, to 25,398 as of 3:08 p.m. Eastern Time. Earlier, it was down 719 points. Boeing and Caterpillar fell the most in the Dow. Both companies get a significant amount of revenue from China and stand to lose heavily if the trade war drags on. Boeing slid 4.2% and Caterpillar was 4.4% lower.

The broader S&P 500 index fell 2.1%. The benchmark index is coming off its worst week since January, though it’s still up sharply for the year. The Nasdaq, which is heavily weighted with technology stocks, slid 2.9%, on track for its biggest daily loss of the year.

Technology stocks were bearing the heaviest losses. Apple fell 5% and Cisco slid 3.4%. Chipmakers and other technology companies have warned that uncertainty over the trade war’s outcome is prompting a slowdown in orders.

Bank stocks also fell sharply. Bank of America dropped 3.8% and JPMorgan Chase fell 2.1%.

Safe-play holdings were the only winners as traders sought to reduce their exposure to risk. Utilities were the only sector to rise on the stock market, and prices for U.S. government bonds, which are considered ultra-safe investments, rose sharply, sending yields lower. The yield on the 10-year Treasury fell to 2.40% from 2.45% late Friday.

Overseas markets also fell. European indexes mostly finished more than 1% lower. In Asia, the Shanghai Composite index fell 1.2%. Japan’s Nikkei 225 index gave up 0.7% and South Korea’s Kospi fell 1.4%.

In another sign of how nervous investors were feeling, an index known as Wall Street’s “fear gauge,” which measures how much volatility the market expects in the future, spiked 27%. The VIX, however, is still far below the elevated levels it reached at the end of last year when the S&P 500 came extremely close to entering a bear market, meaning a decline of 20% or more from a recent peak.

Trade talks between the U.S. and China concluded Friday with no agreement and with the U.S. increasing import tariffs on $200 billion of Chinese goods to 25% from 10%. Officials also said they were preparing to expand tariffs to cover another $300 billion of goods.

China on Monday announced tariff increases on $60 billion of U.S. imports, particularly farm products like soybeans. The price of soybeans slid 0.8% to $8.03 a bushel. They were trading around $9 a bushel last month and are now at their lowest price since December 2008. The falling price has put pressure on U.S. farmers.

Analysts have said investors should prepare for a more volatile stock market while the trade dispute deepens. Many are still confident that both sides will eventually reach a deal.

“Since we see a trade accord being reached in the not-too-distant future, we don’t expect the market to endure more than a short-lived spate of indigestion,” said Sam Stovall, chief investment strategist at CFRA.

The deteriorating trade negotiations follow what has been a mostly calm period of trading where solid economic data and corporate earnings helped push the market steadily higher. The S&P 500 is still up 12.5% of the year with technology stocks blowing away rest of the market with 18.8% gains.

Investors have so far made it through the bulk of first quarter corporate earnings reports in decent shape. Earlier in the year they had expected earnings to severely contract. The results so far show less than a 1% drop in profit.

The escalating trade war threatens to spoil an expected earnings recovery in the second half, however.

“Investors are increasingly worried an anticipated second-half profit rebound may now evaporate as President [Donald] Trump’s threat to tariff the remaining $325 billion in Chinese imports would disproportionately target consumer products like iPhones, thereby posing a greater threat to the consumption-driven US economy,” said Alec Young, managing director of global markets research at FTSE Russell.

Elsewhere in the market, generic drug developers are sinking after many of them were accused of artificially inflating and manipulating prices. The lawsuit from attorneys general in more than 40 states alleges that for many years the makers of generic drugs worked together to fix prices.

Teva, which was specifically mentioned, sank 15.1%. Mylan slumped 9.8%.

Ride-sharing company Uber tumbled another 11% on its first full day of trading following its rocky debut on the stock market Friday. The stock had priced at $45 at its initial public offering but is now trading just below $37.

Gold mining companies were some of the few stocks making gains amid the broad market slump as the price of gold, another safe-play asset, rose 1% to $1,301 an ounce. Newmont Goldcorp rose 2.8%.
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The Supreme Court is allowing consumers to pursue an antitrust lawsuit that claims Apple has unfairly monopolized the market for the sale of iPhone apps.

New Justice Brett Kavanaugh is joining the court’s four liberals Monday in rejecting a plea from Cupertino, California-based Apple to end the lawsuit over the 30 percent commission the company charges software developers whose apps are sold through the App Store.

 

The lawsuit was filed by iPhone users who must purchase software for their smartphones exclusively through Apple’s App Store.

 

Four conservative justices dissented.

 

 
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