Trade winds blew away hopes for a stock market rebound that began Friday to carry over into early trading this morning.
An escalating trade spat between the United States and China appears to have investors worried about the prospects for global economic growth. After all, the nations are the two largest economies on the planet, and a trade war could end up hurting both sides.
Last week, President Donald Trump said the United States would begin imposing a 25 percent tariff on certain Chinese goods starting July 6. In turn, China said it would impose tariffs of its own on some U.S. goods.
That pressured stocks on Friday, but equities did make a bit of an intraday comeback but not enough to end in the green. The Dow Jones Industrial Average ($DJI), the worst performing of the three major U.S. indices on a percentage basis, ended 0.34 percent lower.
Now, it’s looking like the Dow is gearing up for its fifth straight losing session as Monday appears to be shaping up to be a potentially risk-off day. The three horsemen of risk – Treasury bonds, gold and the Cboe Volatility Index (VIX) – are up this morning as investors are apparently looking to dial back on risk. Of the three, gold is perhaps the one in the most tenuous position. It's getting somewhat of a bid, perhaps because of its position as a store of value during times of uncertainty, but it’s also under some pressure as trade worries have been putting pressure on commodities and commodity-linked currencies (more on that below).
The escalation in trade tensions comes as the United States has also been in a trade tiff with Canada, the European Union and Mexico.
The U.S. dollar starts the week near 95, a level from which it has touched and receded several times since last fall. (See figure 1 below). With the U.S. leading the charge toward higher interest rates, and with trade talks pressuring commodities such as gold and crude oil, both of which took it on the chin last week, the dollar might again test the 95 level to the upside.
Sure, a stronger dollar is great if your summer travel plans involve foreign destinations, but from an investor standpoint, you may want to keep an eye on your portfolio if the dollar pushes higher. Multinational corporations, especially exporters such as commodity companies like Exxon Mobil Corproation (NYSE: XOM) and oil services firms such as Halliburton Company (NYSE: HAL), and those with strong international ties, such as McDonald's Corporation (NYSE: MCD) and Starbucks Corporation (NASDAQ: SBUX), have historically felt the pressure of dollar strength.
And remember, the next earnings season is a few short weeks away.
Speaking of oil companies, the Energy Select Sector SPDR (ETF) (NYSE: XLE) led the way lower on Friday, and appears poised for a continuation this morning. Energy was the worst performer among the S&P 500 (SPX) sectors on Friday as crude oil fell markedly ahead of potentially increased output arising from a meeting of the Organization of Petroleum Exporting Countries (OPEC) this week. A slowdown in global trade would also have a negative impact on demand for oil. While lower oil prices could be a boon for consumers of oil, they could negatively impact the profitability of producers.