President Trump’s renewed threats of more tariff pain in the absence of a deal with Beijing — as top administration officials walked back expectations for a breakthrough — helped send stocks plummeting Tuesday.
The Dow Jones industrial average recorded its fourth-worst day of the year on a percentage basis, shedding 3.1 percent. The broader S&P 500 dropped 3.2 percent, falling below its 200-day moving average, a critical threshold for traders. And the tech-focused Nasdaq fell 3.8 percent. The declines all but wiped out gains since last Wednesday, when Federal Reserve Chairman Jay Powell suggested the central bank could moderate the pace of its interest rate hikes. That mini-rally had gained steam as the Trump administration looked to be declaring a cease-fire in the trade war with China.
Investment managers said the Trump team’s erraticism in the wake of the G-20 summit over the weekend sapped confidence that a trade peace is at hand. And the confusion started at the top, with Trump starting his Tuesday by reversing his claim from the weekend that he had secured “an incredible deal” in Buenos Aires. Instead, Trump said in a series of tweets, the weeks ahead will reveal “whether or not a REAL deal with China is actually possible.”
Trump doubled down on the threat hours after the market close on Tuesday:
We are either going to have a REAL DEAL with China, or no deal at all - at which point we will be charging major Tariffs against Chinese product being shipped into the United States. Ultimately, I believe, we will be making a deal - either now or into the future....— Donald J. Trump (@realDonaldTrump) December 5, 2018
.....China does not want Tariffs!— Donald J. Trump (@realDonaldTrump) December 5, 2018
That came even as Chinese officials broke their post-G-20 silence to declare they accept the Trump administration’s 90-day clock for a negotiation and are confident the two sides can reach agreement. The announcement helped contain losses by Asian and European stocks following the bloodletting on Wall Street, and U.S. futures pointed to a slight recovery.
A host of other developments contributed to spooking investors, as Bloomberg noted: The gap between 2- and 10-year Treasurys narrowed to their smallest point in over a decade, setting off alarms a recession could be lurking; British Prime Minister Theresa May’s Brexit plan suffered fresh defeats; and home builder Toll Brothers renewed concerns about a weakening housing market.
But market watchers agreed trade jitters were the primary culprit tanking stocks. “The fact of the matter is this market is going to be volatile until there’s clarity and certainty on tariffs,” Meridian Equity Partners senior managing partner Jonathan Corpina tells me.
While investors should know better by now than to credit a single Trump-driven headline or presidential tweet as the final word on a complex, evolving policy matter, Corpina said algorithmic trading sets off a chain reaction. “The computer systems read the headlines, they trigger program trading and then you get a snowball effect,” he said. “The market turns one way, and then retail and institutional investors jump on. So the swings are much more magnified than they should be.”
In the bigger picture, the shrinking gap between short- and long-term interest rates on Treasury bonds may prove more consequential. An inverted yield curve means short-term debt is yielding a greater return than longer-term debt, because investors are flocking to longer-term bonds as a hedge against what they perceive to be deteriorating economic conditions.
The phenomenon has accurately predicted each of the nine recessions since 1955. And Trump’s trade turbulence could be contributing to a repeat of it now, says Nicholas Colas, co-founder of DataTrek Research. “The two are related,” he says. “If you have more uncertainty because of trade and tariffs, there’s a greater risk for recession.”
Colas noted the link is direct: Corporate managers deciding on whether to make major investments next year may be compelled to hold off if they believe the trade war could turn uglier. “We’re in the middle of budget season, so this comes at an inopportune time.”
The Trump team hasn’t helped provide clarity since the president's dinner with Xi.
Top White Hosue economic adviser Larry Kudlow on Tuesday dramatically rolled back Trump’s Sunday night claim that China would remove tariffs on U.S. auto imports — in fact, Kudlow said, such a move would be a good sign. “Likewise, [Treasury Secretary Steven] Mnuchin returned from Buenos Aires on Monday and said China had committed to purchasing $1.2 trillion in U.S. goods and services — an amount roughly equal to nine years’ worth of China’s current purchases of American-made products,” my colleagues Damian Paletta, David Lynch and Josh Dawsey report. “Mnuchin on Tuesday conceded that the figure covered multiple years.”
Said one top White House adviser, “Nobody knows what the deal is.”
“What’s frustrating from my perspective as someone who manages other peoples’ money is how much is really being put on a president who doesn’t have a good sense of what he says and how the markets react to it. The market’s not trading on fundamentals. It’s trading on tweets and fears that the trade war goes wild,” says Scot Lance, managing director at San Mateo, California-based Titus Wealth Management. “That’s damaging not just short-term but long-term to U.S. and global GDP.”
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— More reaction to Tuesday's sell off.
From The Post's Catherine Rampell:
Presidents don't control stock markets, market is not the economy, etc. Still, once upon a time, Trump used to brag that market gains were a good metric of his success.— Catherine Rampell (@crampell) December 4, 2018
Here's how S&P 500 has fared under Trump vs. Obama, through comparable dates in their respective presidencies pic.twitter.com/trC7R7fxbi
From Charlie Bilello, director of research at Pension Partners:
From Mohamed El-Erian, chief economic adviser for Allianz:
Just like that, the yield on 10 year US government #bonds traded below 2.90% as stock indices lost 3-4% (over 700 points for the #Dow). Raises fascinating economic, technical and policy issues, including whether the #Fed blinked too early #markets #economy #stocks #investing pic.twitter.com/ecTkZ4ONDx— Mohamed A. El-Erian (@elerianm) December 4, 2018
From Bloomberg's Luke Kawa:
— NY Fed prez: More gradual rate rises are likely. WSJ's Michael S. Derby: “A top Federal Reserve official said a solid U.S. economic outlook is very likely to lead to more central bank interest-rate increases over the next year or so, but he didn’t say how many. The Fed is achieving its objectives of steady, low inflation and a healthy employment 'about as well as it ever has,' New York Fed President John Williams said Tuesday at an economic briefing. 'I’m still of the view that with the economy on a really very strong kind of path with a lot of momentum, especially with some of the fiscal tailwinds and other factors, that further gradual [interest-rate] increases over the next year or so still make sense.'
“His remarks bolster already strong market expectations that the Fed will raise its benchmark short-term rate at its policy meeting this month by a quarter percentage point to a range between 2.25% and 2.50%. He refrained from saying what he would like to do at the meeting, and declined to weigh in on the timing of future rate rises. Mr. Williams is a close ally of [Powell], who triggered a market rally last week by signaling fresh flexibility in how the central bank sets interest rates, after two years of tightening policy at a quarterly pace.”
Traders are starting to price in 2020 rate cuts. Liz McCormick and Edward Bolingbroke at Bloomberg News: "Treasuries surged as plunging stocks sparked a bout of risk aversion and traders started betting that the Federal Reserve will cut interest rates as soon as 2020. Traders have been slashing the expected pace of rate hikes since the central bank’s top brass flagged global headwinds to growth and opened the door to a change in the policy path. That move picked up Tuesday. The swaps market has moved up the timing for when it sees the hiking cycle peaking, toward the end of 2019 or early 2020, a period when the Fed’s own projections indicate tightening will still be under way. The shift in the market’s view gained speed this week.”
— Investors in oil confident as supply fears ebb. Bloomberg's Heesu Lee: “Oil headed for its biggest two-day advance since June as concerns over a supply glut eased on hopes that OPEC and its allies will strike a deal to stabilize the market. Futures in New York rose as much as 1.5 percent, extending Monday’s 4 percent gain. An agreement between Saudi Arabian Crown Prince Mohammed bin Salman and Russian President Vladimir Putin over the weekend raised the possibility of an output accord when OPEC and its partners meet in Vienna on Dec. 6. Prices also received a boost after Canada’s Alberta province announced plans to cut production by 325,000 barrels a day. Crude is rebounding from the worst monthly drop in a decade on growing optimism the world’s top oil exporters will tackle the risk of a glut.”
— China will buy soybeans, LNG. Bloomberg: "Chinese officials have begun preparing to restart imports of U.S. soybeans and liquefied natural gas, the first sign confirming the claims of President Donald Trump and the White House that China had agreed to start buying some U.S. products ‘immediately.’ Chinese officials have been told to take necessary steps for the purchases, according to two officials with knowledge of the discussions. It wasn’t clear whether the preparations meant China would cut the retaliatory tariffs it imposed on those products, or when the purchases would happen."
And promises to crackdown on IP theft. More Bloomberg: "China announced an array of punishments that could restrict companies’ access to borrowing and state-funding support over intellectual-property theft, a key sticking point in its trade conflict with the U.S… China set out a total of 38 different punishments to be applied to IP violations, starting this month... 'I think it’s potentially significant if they are implemented and result in a reduction in IP theft,' Scott Kennedy, a China expert at the Center for Strategic and International Studies in Washington. 'We’ve been down this road with China many times on IP. The attention companies pay to IP theft has risen dramatically, and despite the great attention it’s getting the violations have increased.'"
— Tariffs are also driving up cost of public works projects. Mark Niquette at Bloomberg: “If Congress approves a national public-works program next year that Democratic and Republican leaders are proposing, [Trump’s] trade war could inflate the price tag, costing taxpayers and construction companies many millions of dollars . . .
“It’s unclear how much Trump’s tariffs will add to the U.S.’s total repair bill, but for every $1 spent on highway and bridge construction, 10 cents goes toward steel-related materials . . . Contractors generally have to absorb price increases unless they’re working in one of 13 states that allows price escalations in contracts . . . The price of U.S. hot-rolled coil, the benchmark for American steel, is up 20 percent in 2018, largely because of the tariffs. The U.S. Midwest aluminum premium, a shipping and handling charge, has more than doubled.”
— German auto execs meet with Trump. Jordan Fabian at the Hill: “Top executives from three major German automakers met with [Trump] on Tuesday at the White House amid the president's threats to impose new tariffs on European cars. . . . Volkswagen CEO Herbert Diess, Daimler Chairman Dieter Zetsche and BMW's chief financial officer, Nicolas Peter, were among the executives to meet with Trump. . . .
“White House economic adviser Larry Kudlow told reporters on Monday the meeting did not signal the Trump administration 'is moving towards car tariffs,' but was instead designed to encourage German automakers to invest and manufacture more in the U.S. Trump threatened to slap tariffs on European cars after General Motors announced it would shutter several plants and slash thousands of jobs in North America, citing slow sales of cars and electric vehicles.”
— Mnuchin: Congress should pass Trump's USMCA pact without changing it. More from the Hill: “Treasury Secretary Steven Mnuchin on Tuesday dismissed bipartisan criticism of the Trump administration’s renegotiated North American trade pact and urged Congress to pass the deal without changes.” Mnuchin said “Trump expects Congress to approve an updated version of the North American Free Trade Agreement (NAFTA) as written and would terminate the original deal if lawmakers refuse . . . While Trump and his top aides boasted of fulfilling a major agenda item, the deal will not be official until it’s approved by legislatures in [the U.S., Mexico and Canada]. Democrats and a handful of Republicans have denounced the new NAFTA, threatening its chance for passage in Congress.”
- "Mueller seeks no prison time for former national security adviser Michael Flynn, citing his ‘substantial assistance.’" The Post's Carol D. Leonnig, Rosalind S. Helderman and Devlin Barrett.
- "Manafort discussed deal with Ecuador to hand Assange over to U.S." NYT's Kenneth P. Vogel and Nicholas Casey.
- "The 4 ways Russian collusion might have occurred." The Post's Aaron Blake.
“D.C., Maryland begin seeking Trump financial documents in case related to his D.C. hotel.” The Post’s Jonathan O’Connell, Ann E. Marimow and David A. Fahrenthold.
— Jamie Dimon: A recession wouldn't be bad. JPMorgan Chase CEO Jamie Dimon to CNBC on Tuesday: “I don’t look at a recession as a bad thing. I mean, it’s bad for America. It’s bad for people who are unemployed. it’s usually an opportunity for J.P. Morgan. So I don’t sit there and say, ‘Oh my god, that’s terrible. Earnings will be down.’ I say, ‘Ok, what are we going to do, to do even more that we want to do. So I think there will be opportunities in a downturn, too, which hopefully we’ll be prepared for.”
Activists are following Dimon across the U.S. Bloomberg's Michelle Davis and Max Abelson: “JPMorgan is so big and profitable, and the billionaire has won so much influence, that he’s being followed around the U.S. by a growing crew of critics who want the bank to join their fights against climate change, human-rights abuses, and private prisons. They’ve tried to get his attention by scaling Park Avenue flagpoles, blocking Seattle traffic with tepees, bursting into conferences, and blasting audio of crying children outside his apartment."
From Julia Horowitz of CNN Business:
— Walmart has hired robotic janitors to clean floors and collect data. The Post's Peter Holley: “Walmart’s latest custodial tool may look like a mini Zamboni, but it’s more like a Roomba, the robotic sweeper sliding across floors worldwide. This week, the big-box retailer announced plans to place 360 autonomous robots inside Walmarts across the country by the end of January. Their job: scrubbing the store’s expansive aisles and collecting data in the process. . . . Automation will allow workers to perform new tasks in some industries, but it won’t stop millions of people from needing to switch occupations or upgrade their skills in the coming years.”
— China maneuvers to snag top-secret Boeing satellite technology. WSJ's Brian Spegele and Kate O’Keeffe: “Workers at a Boeing Co. plant in Los Angeles are nearing completion of a new satellite, which uses restricted technology relied on by the U.S. military. It was ordered by a local startup that seeks to improve web access in Africa. In reality, the satellite is being funded by Chinese state money, according to corporate records, court documents and people close to the project.
“About $200 million flowed to the satellite project from a state-owned Chinese financial firm in a complex deal that used offshore companies to channel China’s money to Boeing . . . Such technology would help fill in a missing piece of the puzzle for China as it seeks to secure its status as a superpower alongside the U.S. It would bolster China’s burgeoning space program, as well as initiatives to dominate cutting-edge industries and expand its influence in the developing world.”
— You're sharing more than you think when you use Venmo. WSJ again: “Venmo does well what it’s supposed to do: let friends exchange money quickly and easily. By default, it posts those transactions in a social-media-style feed—seeing who shared meals and drinks with whom, and which emojis they favor, can make an otherwise boring process mildly entertaining. Theoretically, Venmo lets users control who sees those posted items. But Venmo has a spotty record on privacy and transparency."
— Stephen K. Bannon and a fugitive billionaire find a common enemy in China. NYT's David Barboza: “Just months after being pushed out of the White House, Stephen K. Bannon, [Trump’s] former chief strategist, met with a fugitive Chinese billionaire at a suite in the luxurious Hay-Adams Hotel in Washington. The billionaire, Guo Wengui, who is also known as Miles Kwok, was living in New York City and had landed on China’s most-wanted list, accused of bribery, fraud and money laundering. He was also a dissident and fierce critic of Beijing, seeking political asylum in the United States. And Mr. Bannon — increasingly obsessed with the emerging China threat — was eager to talk about the Communist Party, corruption and American naval operations in the South China Sea. Since their first discussion in October 2017, they have met dozens of times . . . It’s an unusual partnership between two political gadflies with a common, if overly grand, objective: bringing about the demise of the Chinese Communist Party.”
— How Trump team curbed the CFPB. The Post's Robert O'Harrow Jr., Shawn Boburg and Renae Merle: "One year after [Mick] Mulvaney’s arrival, he and his political aides have constrained the agency from within, achieving what conservatives on Capitol Hill had for years been unable to do, according to agency data and interviews with career officials. Publicly announced enforcement actions by the bureau have dropped about 75 percent from average in recent years, while consumer complaints have risen to new highs, according to a Washington Post analysis of bureau data. Over the past year, the agency’s workforce has dropped by at least 129 employees amid the largest exodus since its creation in 2010, agency data shows..."
Mulvaney recruited political appointees to monitor each division, "some receiving salaries of up to $259,500. They had little experience in consumer protection enforcement or managing large groups of people, their résumés show. But many had a common profile, having worked for the financial sector or against the bureau. Two others had also worked as Hensarling aides, one of them a former financial lobbyist, according to their résumés. A third was a lawyer who once argued that the bureau was 'unconstitutional' while representing a bank accused of deceptive practices, legal documents show."
— DOJ charges 4 over Panama Papers tax schemes. The Post's Devlin Barrett: "The Justice Department charged four people Tuesday with scheming for decades to hide tens of millions of dollars from the Internal Revenue Service — the first U.S. indictment over alleged tax evasion revealed in 2016 through the Panama Papers. The four people charged include a former investment manager, a former U.S. resident, an American accountant and a Panamanian lawyer who once worked for the firm at the center of the case, Mossack Fonseca.
"'Panama Papers' is the name given to a trove of more than 11 million documents from the Mossack Fonseca firm, which a consortium of journalists made public in April 2016, leading to criminal investigations throughout Europe into possible tax evasion and money laundering. The 11-count indictment unsealed in New York marks the first time the U.S. government has charged anyone with tax crimes related to the firm — and authorities suggested others could soon be charged."
— Treasury recommends review of postal rates, not just for Amazon. The Post's Rachel Siegel: "A task force commissioned by [Trump] to evaluate the Postal Service’s business model is recommending a slew of options to make it more profitable. But it did not go so far as to say the financially strapped Postal Service is losing money to Amazon, a company which contracts services from the Postal Service and that has consistently drawn Trump’s ire. Even though the 70-page report does not specifically cite its contract with Amazon, it does recommend a reevaluation of the pricing for e-commerce packages and other non-essential mail shipped by companies such as Amazon." (Amazon CEO Jeff Bezos also owns The Post.)
- The Hamilton Project at the Brookings Institution hosts an event on “policy options to promote employment” on Thursday in Washington.
- Senate Banking Committee hearing on “oversight of the U.S. Securities and Exchange Commission” on Dec. 11.
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