Risk Off as Trade Tensions Rise

 

Trade Tensions Escalate, Then Ease

After President Trump pledged to put an additional 10% tariff on another $200 billion of Chinese goods and ordered that these products be identified, he then ordered that any retaliation from China be met with an additional $200 billion in tariffs.  This is on top of the $50 billion in goods the White House has already targeted for tariffs.  China, not intimidated, issued the following statement promising retaliation: “If the U.S. loses its senses and publishes such a list, China will have to take comprehensive quantitative and qualitative measures.”  Furthermore, the Chinese Ministry of Commerce classifies the Tariffs as “extreme pressure and blackmail.”  President Trump was not optimistic about resolving the trade tensions through talks. He reiterated his sense that the trade deficit with China was “unfair”.  However, the concern over tensions seemed to ease late in the day. 

 

Risk Off for Trade War

Trade tensions led to a flight to quality assets today generating a big move across various asset classes.  Equity markets felt the heat, with all three major indices down on the day.  If not for a late day rally, the losses could have been even greater.  The DJIA was the “biggest loser” sinking 1.15%, followed by the S&P falling 0.40%, and the NASDAQ dropping 0.28%.  Flows seemed to move into the quality assets with Treasuries rallying throughout the day — yields on treasuries across the curve were off 1-3 bps with the 10-year closing at a yield of 2.89%.  In foreign exchange markets, the US Dollar (USD) gained 0.3% vs. the Euro (EUR), and was up 0.5% vs. the Pound (GBP).  The moves were based on Mario Draghi’s dovish comments as he spoke of patience around raising rates in the European Union and political uncertainty around the Brexit process in the British Parliament.   As the dollar gained, crude oil futures fell 1.2% to $65.07/barrel. 

 

Housing Starts Exceed Expectations

For the month of May, housing starts rose 5.0% MoM to 1.35 million on an annualized basis, exceeding the expectation of 1.311 million.  This is the biggest number recorded since 2007, the prior month was revised downward by 1k from 1.287 million to 1.286 million.  Single family home starts rose by 35k from 901k to 936k.  Multi-family starts were also up rising to 414k from 385k.  Home affordability remains a challenge with both property values and borrowing costs again rising at rates income levels have not been keeping pace with.  This report seems to show that the overall housing market remains strong and that demand remains high.  Regionally, both the Northeast and the Midwest experienced an uptick in permits, further supporting the claim that demand remains high.