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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 [4]

Senior Market Analyst, The Americas at OANDA
With more than 20 years’ trading experience, Ed Moya is a senior market analyst with OANDA, producing up-to-the-minute intermarket analysis, coverage of geopolitical events, central bank policies and market reaction to corporate news. His particular expertise lies across a wide range of asset classes including FX, commodities, fixed income, stocks and cryptocurrencies. Over the course of his career, Ed has worked with some of the leading forex brokerages, research teams and news departments on Wall Street 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 CNBC, Bloomberg TV, Yahoo! Finance Live, Fox Business and Sky TV. His views are trusted by the world’s most renowned global newswires including Reuters, Bloomberg and the Associated Press, and he is regularly quoted in leading publications such as MSN, MarketWatch, Forbes, Breitbart, The New York Times and The Wall Street Journal. Ed holds a BA in Economics from Rutgers University.
Ed Moya