Volatility came back to the markets over the last week and a half. These large, quick moves to the downside were caused by disruptions in trade talks with China. In a surprise move to many last Sunday, President Trump decided to bump the 10% tariff rate on $250 billion of Chinese imports to 25%. On top of that, another $300 billion of imports from China was threatened with a 25% tariff. Investors had believed China and U.S. were close to finalizing a trade deal; however, both sides accused the other of backing away from commitments that were critical to the deal. As this unraveled, the U.S. upped its tariffs on Friday morning and China announced retaliatory tariffs on $60 billion of imports on Monday. These tariffs on U.S. goods will go into effect on June 1st giving both sides some time to become more conciliatory.
Investors quickly changed their base case scenario from one with a trade deal in the near future to one with multiple tariff increases that would likely drag on for weeks, if not months. The reaction was swift as markets fell due to perceived reduced demand for products and increased cost pressures for companies. The yield curve inverted again on Monday as bond investors interpreted slower economic growth in both countries from the actions. The market is pricing in the possibility of a Fed Funds rate cut as soon as September. The 10-year Treasury bond yield fell close to the lows of the year. The S&P 500 has now fallen almost 5% from its highs of this year with companies that have exposure to China suffering the most.
A truce to the trade war is becoming more difficult to visualize. Most analysts believe it will take a meeting between President Trump and President Xi of China to make enough headway to put talks back on track. The most likely forum for this is the G-20 talks in late June. In fact, President Trump has already announced he intends meet with Xi at the G-20. The flaw with this timeline is that both sides are scheduled to increase tariffs before this date allowing both China and the U.S. to become more entrenched in their respective stances. With the current increased volatility and high likelihood of continued volatility in the near term, Broadway Wealth Management continues to manage our client's capital prudently with these changing global dynamics in mind.
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