Escalating US-China trade war hits stocks again

The ongoing battle between China and the US is hurting the stock market. Photo/Getty Images.

Global markets sagged Thursday as uncertainty over trade relations between the United States and China continued to sour investors.

The Dow Jones industrial average plunged 448 points at its low before clawing back late in the day to finish at a loss of 286 points, or 1.11 per cent, driving it into negative territory for the week. If the Dow were to finish in the red for the week, it would be the fifth week in a row and the first such slump in eight years.

Technology continued to sink the blue chips as President Donald Trump ratcheted up pressure on Chinese tech firms. United Technologies and IBM led the Dow Jones downward. Energy was hit by a steep drop in oil prices, dragging Exxon Mobil and Chevron with it. Energy, technology, industrials and financials were the biggest losers of 11 sectors. Utilities and real estate were the only gainers on the day.

All three major US indexes finished down more than 1% as the United States and China exchanged accusations over trade and amid the continuing fallout from Trump's restrictions on doing business with Chinese smartphone giant Huawei Technologies. The Standard & Poor's 500 index dropped 1.19 per cent to close at 2,822. The technology-laden Nasdaq Composite dropped 1.58 per cent, finishing at 7,628.

Despite the past month's pullbacks, the Dow is still up nearly 9 per cent in 2019. The S&P 500 is ahead 12% and the Nasdaq is up more than 14 per cent this year.

The trade tensions have stymied global growth, resulting in a considerable pullback in corporate earnings estimates for all of 2019.

"The market is adapting to the fact that we are looking at much lower growth estimates," said Chase Hinderstein, portfolio manager with The Wise Investor Group in Reston, Virginia. "Earnings estimates for the S&P have been reduced tremendously, to 3.2 per cent for this year compared to estimates of 7 per cent at the beginning of 2019 and 10 per cent last September."

Shares of the FAANG technology leaders - Facebook, Amazon, Apple, Netflix and Google-parent Alphabet - tumbled as more companies said they would abide by the restrictions against Huawei. Apple depends on China for a significant amount of its revenue.

The yield on the closely watched US 10-year Treasury had dropped to a 52-week low in a sign that investors were moving out of stocks to less risky assets. Bond yields move inversely to bond prices.

"It's all trade and tech," said Ivan Feinseth, chief investment officer at Tigress Financial Partners. "Tech and hopes for a trade deal drove the market up. And now it's driving it down."

European and Asian markets also dived, with the European STOXX 600 dropping 1.4 per cent, the German Dax falling 1.8 per cent, and France's CAC 40 tumbling 1.8 per cent. China's tech-heavy Shanghai Composite closed down 1.4 per cent, while the Hong Kong Hang Seng Index dropped 1.6 per cent.

Meanwhile, surveys released Thursday signalled economic weakness around the globe.

The closely watched Purchasing Managers Index, a key measure of industrial activity, showed slowdowns in the United States, Japan and Europe as US-China trade anxiety rippled. A similar trend line is playing out in Germany, according to a survey by the German think tank Ifo Institute for Economic Research.

"Investors are reevaluating the economy, not just the US but the global economy, with respect to new possibilities of restrictive trade and tariffs," said Howard Silverblatt of S&P Dow Jones Indices. "We are starting to see companies react to the possibility of higher tariffs and higher prices over the long term."

Growth in US manufacturing reached a nine-year low, according to financial data released Thursday.

US stocks had been on a roll coming into May because of the strong US economy, which is thriving on low interest rates, record low unemployment and robust corporate earnings. The number of jobless claims last week unexpectedly fell, indicating a health economy and labour market. But external forces detoured the markets in recent weeks as anticipation of a US-China trade deal evaporated. The Federal Reserve also signalled that it probably will not raise interest rates this year, feeding more disappointment.

The United States finds itself in a dangerous war of wills with the Iranian government over US sanctions against that country over its nuclear program and the US belief that Iran is a supporter of terrorism. The Trump administration dispatched an aircraft carrier, bombers and other military equipment to the Persian Gulf region this month as tensions between the two countries escalated.

"After posting the third best year-to-date return through April since WWII, the US equity markets were vulnerable to any potential setback," said Sam Stovall, chief investment strategist at CFRA Research. "Investors were then greeted by disappointing news about rate cuts from the Fed and a breakdown in the much-anticipated culmination to the China-U. S. trade discord."

Oil prices went into the steepest drop of 2019 on Thursday as US-Iran tensions appeared to ease. Key oil benchmarks declined more than $3 each. US West Texas Intermediate dropped more than 5%, to $58.14 per barrel. Benchmark Brent crude pulled back 4.3%, to $67.92.

"There's obviously back-channel communications going on," John Kilduff of Again Capital said. "The Trump administration is trying to tamp down the situation. The market rightfully built in several dollar of risk premium in the oil prices, and to the extent the tensions are easing, that premium is coming out."

- Washington Post