…Stocks crash. FAANGs lose a fortune. Banks slammed. China-US trade deal not a real deal, yet. Inversion is here. Quitar (sounds like something Tariff Man would say).
Financial Review by Sinclair Noe for 12-04-2018
DOW – 799 = 25,027
SPX – 90 = 2700
NAS – 283 = 7158
RUT – 68 = 1480
10 Y – .07 = 2.92%
OIL – .34 = 52.61
GOLD + 7.70 = 1239.00
The Dow’s loss of 3.1% sent the industrials back below the 50-day moving average, just one day after the index climbed back above that key line. The Nasdaq composite was punished by a 3.8% plunge, while the S&P 500 tumbled 3.2%. Both fell back below their 200-day moving averages, and the Nasdaq now appears to have hit resistance at its 50-day line. For its part, the S&P 500 also turned back below its 50-day average, after all of one day above it. The Dow managed to hold support at 25,000, and the S&P found a floor at 2700. Tech stocks are back in correction territory after a painful day for public exchanges. In total, the FAANG stocks — Facebook, Amazon, Apple, Netflix and Alphabet-owned Google — shed more than $140 billion in market value by the end of the trading Tuesday.
Here’s how it shook out: Facebook fell 2.2 percent, losing $7.6 billion in implied market value; Amazon fell 5.9 percent, losing $50.8 billion in implied market value; Apple fell 4.4 percent, losing $38.5 billion in implied market value; Netflix fell 5.2 percent, losing $6.5 billion in implied market value; Alphabet fell 4.8 percent, losing $37.5 billion in implied market value. Amazon and Netflix, though, are each up more than 40 percent year-to-date despite getting caught in the rout. Alphabet is hanging onto modest year-to-date gains, up just a fraction of a percent in 2018.
Regional banks dipped into bear market territory as long-term interest rates sank. Shares of SunTrust, Citizens Financial Group, Fifth Third Bancorp and Regions Financial all fell more than 5 percent. The SPDR S&P Regional Banking ETF lost 5.5 percent and fell into bear market territory, more than 20 percent off its all-time high notched in June. The ETF posted its worst day since June 2016 and Brexit. Larger banks including Bank of America, Morgan Stanley and Citigroup all dropped more than 4 percent. When the yield curve steepens, banks can take advantage of a bigger spread between the rate at which they borrow money and the rate at which they lend.
Last Wednesday we had a big rally on Wall Street in anticipation of some sort of resolution of the trade war with China. Today’s losses wipe out the gain from last week. Over the weekend, Trump met with China president Xi Jinping and after dinner, they announced a deal. Trump called it “extraordinary” – it wasn’t. At best, it was as modest compromise. Trump agreed to temporarily hold off on increasing tariffs on $200 billion of Chinese goods in exchange for China purchasing a still-to-be-defined amount of American-made products. Trump declared that China had agreed to reduce and remove tariffs on cars coming into China from the US, and he wrote that China intends to “start purchasing agricultural product immediately” from the US. To be clear, there is not a signed agreement; China is not buying more agricultural products, at least not yet; the existing tariffs, already in place will remain in place. None of the current tariffs have been cancelled or rescinded or trimmed. The deal just says nobody will jack up tariffs for 90 days – a pause in the escalation.
This morning Trump tweeted: “President Xi and I want this deal to happen, and it probably will, but if not remember, I am a Tariff Man. When people or countries come in to raid the great wealth of our Nation, I want them to pay for the privilege of doing so. MAKE AMERICA RICH AGAIN!” Stop for just a moment – and remember that tariffs are taxes paid by American consumers and companies. You do not get rich paying taxes. Trump added that a 90-day timetable for negotiators to reach a deeper agreement had begun and that his aides would see “whether or not a REAL deal with China is actually possible.” Treasury Secretary Steven Mnuchin put a fine point on the pseudo-deal, saying China agreed to buy $1.2 trillion of U.S. products. But he added, “if that’s real”. If that’s real? Why sure, the deal with China is as real as Tariff Man. What the hell is that? Seriously, what the hell is Tariff Man? So far, Tariff Man’s, the fiscally irresponsible super power, whose super power seems to be the ability to make White House officials contort like pretzels to reconcile Trump’s tweets (which seem if not completely fabricated then grossly exaggerated) with reality. Trump tweeted: “China has agreed to reduce and remove tariffs on cars coming into China from the U.S.” Economic advisor Larry Kudlow then made the media rounds and said: “I believe that commitment was made.” Chinese officials haven’t confirmed any car tariff agreement, either. The dinner was Saturday. Today is Tuesday. Kudlow needs to check his messages. The weekend is over kids and your assignment is due.
Moody’s Investors Services put an even finer point on the non-deal: “We expect the relationship between the world’s two largest economies to remain contentious. Narrow agreements and modest concessions in their ongoing trade dispute will not bridge the wide gulf in their respective economic, political and strategic interests.”
Even if it is true that China has agreed to reduce US car import tariffs to zero — which is not at all guaranteed — it might be better for other countries, such as Japan, South Korea, and Germany, than it is for the US because of the rules of the World Trade Organization that bar countries from giving special perks to certain others: If Beijing lowers the tariff rate on US autos to zero, it must also do that for all other countries that want to sell their vehicles in the Chinese market. That still may increase the number of American cars sold in China, but other nations will likely be the ultimate winners.
Tariff Man’s other super-power seems to be the ability to convince soybean farmers that they must bankrupt the family farm. On agriculture, Kudlow could not say how China’s agricultural product purchases would work but said that his “expectation” is that China will roll back tariffs on goods “quickly.” Not sure if that clears it up. Trump tweeted that “negotiations have already started” – 40 minutes and 5 tweets later, he tweets: “let the negotiations begin.” Tariff Man’s other super-power seems to be the ability to make stock prices plunge. Today was a lively sell-off, with a bond inversion hanging like the Sword of Damocles over the markets. The thing the bond market most feared is starting to happen – Inversion between 3-year and 5-year notes and 2-year and 5-year notes; and traders think that means the widely watched 2-year to 10-year will also soon invert. The 2-year yield is 2.81% and the 5-year yield is 2.80%. The 10-year note yield dropped to 2.92% and that leaves the spread between the 2 and 10 at just 11 basis points – flattening and trending toward inversion. An inversion of the 2- and 10-year yields has been a reliable recession indicator in the past. Not all inversions have led to a recession, but recessions have always been preceded by inversions. The timing could vary, depending on the cycle. But it’s typically a matter of months, not days or weeks, when such an event could happen. That might put 2s and 10s inversion on the table by the end of the year, and if not, then around the March FOMC meeting.
Brexit is so 2016. So, what’s the latest linguistic mash-up to grace cable news networks? Quitar. As in Qatar is leaving OPEC for other, oily pastures. Qatar isn’t alone in turning a back to the Saudis. A bipartisan group of senior senators said that a classified briefing by the CIA director had only solidified their belief that Mohammed bin Salman, the crown prince of Saudi Arabia, ordered the killing of Saudi dissident Jamal Khashoggi. Sen. Bob Corker said if Mohammed bin Salman were in front of a jury, “he’d be convicted [for murder] in 30 minutes.” Of course, Corker is retiring; he can say whatever he wants. Minutes earlier, Sen. Lindsey Graham, a Trump ally, told reporters that the crown prince is “complicit” in the journalist’s killing. Graham also said he wouldn’t support arms sales to the kingdom as long as MBS remains in charge. There’s a Senate bill to stop all US involvement in the Saudi-led war in Yemen up for a vote next week, but neither Corker nor Graham would commit to voting for it. The question now is what senators — or Trump — will do. From the looks of things, not much. Oil prices climbed from recent lows ahead of a meeting Thursday and Friday among OPEC and other major producers led by Russia, who are expected to make a deal to cut coordinated output levels.
Thousands of Marriott workers are going back to work. You might not have noticed but the workers were on strike for the past 2 months at 23 Marriott hotels in 8 cities, including: Boston, Detroit, several cities in California and Hawaii. In recent weeks, union representatives in several cities reached a deal with the world’s largest hotel chain. The contract for workers at San Francisco’s Marriott hotels was the last one. About 2,500 striking hotel workers in San Francisco ratified a new contract with the hotel chain last night.