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MCF Investment Department Market Update - May 17, 2019

By: Nick Newell, FRM

Last week’s market news was dominated by Trump threatening additional tariffs from 10% to 25% on $200B of Chinese goods.1 Both sides left D.C. last Friday without a resolution and the public left only with U.S. Treasury Secretary Mnuchin’s intentionally vague comment that discussions were “constructive.”2 Trump’s threat proved legitimate, with the increase taking effect last Friday. In response, China has now announced raising tariffs on $60B of U.S. products from previous 5%-10% levels to 25% to match, which are scheduled to begin June 1. The next public opportunity for negotiation will be the G20 summit in Osaka June 28 and the lingering dispute will continue to remain a known unknown.

As a result of these developments or lack thereof, the S&P 500 has fallen just over 4.5% from May 3 (last close prior to announcement) to Monday’s May 13 close; more than half of this drawdown occurred on Monday 5/13.3 MSCI Emerging Market Index has fallen just over 6% for this same time period.4 The direct cost to the U.S. from the increased tariffs would be 15% x $200B = $30B, a trivial amount in comparison with last year’s GDP of $20.89 trillion (not billion). Other economic indicators have been broadly positive, so the trade dispute may be a one-time setback against a fundamentally stable and growing economy.

In other news, Treasury yields have fallen as is typical in declining markets for participants seeking safer assets. Equities had a strong rebound Tuesday 5/14 and it appears to be sticking so far.5 Retail sales and industrial production reports were a little soft but not a cause for concern as these types of data are usually choppy. Big indicators to watch this week include housing starts, jobless claims, and Fed business outlook survey reports.6

1Bloomberg.com, Bloomberg, www.bloomberg.com/news/articles/2019-05-05/trump-says-10-china-tariffs-will-rise-to-25-on-friday.

2Pramuk, Jacob. “Treasury Secretary Mnuchin Says China Trade Talks Are Done for the Day.” CNBC, CNBC, 10 May 2019, www.cnbc.com/2019/05/10/chinas-liu-leaves-trade-talks-with-trump-team-in-washington.html.

3“S&P 500 (^GSPC) Stock Historical Prices & Data.” Yahoo! Finance, Yahoo!, 15 May 2019, finance.yahoo.com/quote/^GSPC/history/.

4“MSCI Emerging Markets Historical Rates.” Investing.com, www.investing.com/indices/msci-emerging-markets-historical-data.

5“U.S. Department of the Treasury.” Daily Treasury Yield Curve Rates, www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield.

Econoday Inc. 2019 Economic Calendar, us.econoday.com/byweek.asp?cust=us.

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