Stocks Drop as Recessionary Pressures Build

The global bond market rout continues as markets selloff as Chinese media claims Beijing is ready cut rare earths exports to the US.  China has been handling roughly 80% of US imports of rare earths, a commodity that is needed in the automobile, electronics and defense sectors.  It appears the financial markets are convinced the trade war is not going to yield anything promising anytime soon and new risks are emerging.  If China does follow through on its rare export ban, the effect would cripple high tech manufacturing and disrupt earnings figures for many S&P 500 companies for several quarters.  Chinese consumers may also boycott US goods and that would also be another catalyst for a drastic downgrade with earnings forecasts.  Ten-year Treasury yields are lower by 4.0 basis points to 2.226%, just off the lowest levels since October 2017.  US stocks are poised to open sharply lower, with the Nasdaq leading the way down with a 0.85% decline.  Dow futures are 0.79% and the S&P 500 is lower by 0.68%

Fed

When will the Fed capitulate?  The bond markets are taking the 10-year Treasury yield on a fast path to 2.0% and possibly below, while the Fed has remained consistent with their patient approach, but that should not last much longer.  The data-dependent central bank should quickly pivot once the data turns ugly and we should start seeing that shortly.  This week we will get a second glimpse at the US first quarter GDP reading, but the market may closer attention to see if the Core PCE reading stays steady at 1.3%.  Since the US is slowly building a positive output gap, disinflationary pressures should win out and prove inflation is not transitory and allow the Fed to cut rates.  We may see a downward revisions this week with PCE, but most likely we will need to see the second quarter GDP and Core PCE deteriorate to confirm the Fed’s capitulation.

 

 

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Ed Moya

Ed Moya

Senior Market Analyst at OANDA
With more than 20 years’ trading experience, Ed Moya is a market analyst with OANDA, producing up-to-the-minute fundamental analysis of geo-political events and monetary policies in the US, Europe, the Middle East and North Africa. Over the course of his career, he has worked with some of the world’s leading forex brokerages and research departments including Global Forex Trading, FX Solutions and Trading Advantage. Most recently he worked with TradeTheNews.com, where he provided market analysis on economic data and corporate news. Based in New York, Ed is a regular guest on several major financial television networks including BNN, CNBC, Fox Business, and Bloomberg. He is often quoted in leading print and online publications such as the Wall Street Journal and the Washington Post. He holds a BA in Economics from Rutgers University. Follow Ed on Twitter @edjmoya ‏
Ed Moya