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Stocks fall sharply as trade concerns dominate
Trade tensions remain high as markets await the list of $50 billion of Chinese products subject to U.S. tariffs
U.S. vehicle sales will be watched for any improvement in consumer spending

Stocks fall sharply as trade concerns dominate — The U.S. stock market fell sharply on Monday with the S&P 500 index closing down -2.23%. Tech stocks had another rough day with the Nymex FANG+ index closing the day down -3.37%. Meanwhile, the Nasdaq 100 index fell to a new 7-week low and closed the day down -2.89%. Technical selling snowballed as the S&P 500 index closed below its 200-day moving average for the first time since June 2016. In addition, semiconductor stocks plunged more than 5% on a report that Apple will ditch Intel chips in favor of its own chips starting in 2020.

Stocks fell sharply as the market continues to fret about trade tensions after China on Sunday announced the implementation on Monday of its previously-announced retaliatory tariffs for U.S. steel-aluminum tariffs. In addition, the markets are waiting to see if the Trump administration goes through with its threat of tariffs on $50 billion of Chinese products for IP violations, and for China’s likely retaliation. Meanwhile, there were new concerns about NAFTA after President Trump over the weekend in a tweet threatened to cancel NAFTA if Mexico doesn’t do more to secure its border.

Tech stocks continue to see weakness on the same factors that have burdened the section over the past several weeks: (1) heavy long liquidation pressure, (2) concern about tech regulation with the Facebook privacy breach, and (3) concern about the Trump administration’s plan to block Chinese investment in sensitive industries, which reduces the M&A premium for the tech sector.

Another bearish factor is the market’s knowledge that corporations are currently stepping back from buybacks during the Q1 earnings season that kicks into gear in two weeks. SEC rules specify that corporations cannot engage in stock buybacks during the period of 5 weeks before an earnings report and until 48 hours after the report.

Trade tensions remain high as markets await the list of $50 billion of Chinese products subject to U.S. tariffs — China on Sunday announced that its previously-announced tariffs on $3 billion worth of U.S. goods would take effect on Monday. The tariffs on some 128 products were in retaliation for President Trump’s steel and aluminum tariffs. Those U.S. products now subject to tariffs include fruit, nuts, wine, pork, ethanol, certain steel products, and others.

Regarding the U.S. steel-aluminum tariffs, the Trump administration has given a range of countries, including Europe, a temporary exemption until May 1 to provide more time for negotiations. However, if Europe doesn’t end up getting a permanent exemption from steel-aluminum tariffs, it has already said it would levy tariffs on about $3.5 billion of U.S. products, which would obviously present additional negative trade news for the markets.

Regarding the U.S. tariffs on $50 billion of Chinese products for IP violations, U.S. Trade Representative Lighthizer has until this Friday (April 6) to release the exact list of those products. However, Mr. Lighthizer might well announce the list of products before Friday. After that proposed list is released, there will then be a 30-day public comment period. After the comment period, Mr. Lighthizer could announce a final tariff plan at basically anytime. The schedule means that there is still time for a negotiated solution. Treasury Secretary Mnuchin about 10 days ago said he was “cautiously hopeful” for a negotiated solution but in the meantime the Trump administration appears determined to continue with the procedure for levying those tariffs.

China has yet to announce any retaliatory measures for the Trump administration’s announcement of tariffs on $50 billion of Chinese goods for IP violations. However, China could make that announcement at any time if Chinese officials see little hope for negotiations or think such an announcement would improve their bargaining position. Any Chinese retaliation for U.S. tariffs on $50 billion of Chinese products will be much larger than the response to the steel-aluminum tariffs, which involved tariffs on only $3 billion of U.S. goods. The U.S. stock market would undoubtedly take a fresh hit if China announces retaliation for the U.S. IP-related tariffs.

U.S. vehicle sales will be watched for any improvement in consumer spending — The consensus is for today’s March total vehicle sales report to dip slightly to 16.90 million from Feb’s 16.96 million. Vehicle sales spiked higher last September to a 12-year high of 18.47 million units due to the need to replace vehicles damaged by hurricanes. However, vehicle sales then tailed off through the rest of 2017 and stabilized near 17 million units in Jan-Feb, which is close to the 12-month average of 17.14 million.

The markets will watch today’s vehicle sales report closely to see if consumer spending picked up in March. Despite strong consumer confidence, personal spending in Jan and Feb was weak at +0.2% m/m, suggesting that consumers in early 2018 were in a conservative spending mood. The economy needs a significant improvement in consumer spending in March in order for GDP to reach the consensus expectation of +2.5%. The Atlanta Fed’s GDPNow forecast for Q1 GDP dipped as low as +1.8% in the latter half of March due to weak U.S. economic data. GDPNow last Thursday then boosted its Q1 GDP forecast to +2.4%, but that boost was mainly due to expectations for a substantial increase in the inventory contribution to GDP, not to any big improvement in spending. Indeed, GDPNow is still forecasting that consumer spending will contribute only +0.90 percentage points of growth to Q1 GDP, which is less than half of the average quarterly contribution of 2.0 points seen during 2017.

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