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Stocks See Worst Decline of 2019 as China Raises Trade Tensions With U.S. Stocks See Worst Decline of 2019 as China Raises Trade Tensions With U.S.
(32 minutes later)
Stocks dropped for the sixth straight session on Monday, in Wall Street’s worst day of the year, as China’s decision to let its currency sink against the dollar risked opening a dangerous new front in a trade war that is weighing on the world’s economy. China introduced a powerful weapon to the trade war on Monday, letting its currency weaken sharply in a move that left financial markets lurching and investors worried about how the worsening hostilities between Beijing and Washington would affect corporate profits and the already slowing pace of global growth.
The move was the latest escalation in the trade dispute between Washington and Beijing. Last week, President Trump pledged to impose tariffs on another $300 billion of imports from China, dashing hopes that a truce between the countries might be in reach. On Wall Street, stocks experienced their steepest drop of the year, conclusively ending a period of muted trading during which the market notched record after record.
The recent calm was first punctured last week by President Trump’s threat to impose new tariffs on $300 billion of imports from China. But it was Beijing’s decision to allow its currency to cross the psychologically important barrier of 7 per dollar that pushed investors to abandon any lingering hope that a trade truce — worked out in a face-to-face meeting between Mr. Trump and Xi Jinping, China’s leader, a little over a month ago — would hold.
“That has just totally disintegrated,” said Ryan Detrick, senior market strategist at LPL Financial. “Now China is just clearly firing back and that has people uncomfortable.”“That has just totally disintegrated,” said Ryan Detrick, senior market strategist at LPL Financial. “Now China is just clearly firing back and that has people uncomfortable.”
The S&P 500 dropped 3 percent, with selling especially heavy in the trade-sensitive technology, consumer discretionary and industrial sectors. The S&P 500 fell nearly 3 percent on Monday, the benchmark index’s sixth straight drop. The sell-off has lopped a significant chunk off this year’s market gains. The S&P 500 was up 20.7 percent for the year as recently as July 26. After Monday, investors were up 13.5 percent.
The rout on Wall Street followed an overnight sell-off in Asian and European markets, after China’s tightly controlled currency, the renminbi, dipped more than 1 percent against the dollar and crossed the psychologically important barrier of 7 per dollar. The rout on Wall Street followed an overnight sell-off in Asian and European markets, prompted by a drop of more than 1 percent against the dollar for China’s tightly controlled currency, the renminbi.
A move of that magnitude is considered quite large in the currency markets. But it was especially notable for the renminbi, which China has kept from crossing 7 for more than a decade. Beijing’s decision to let it fall was widely viewed as a signal that China was girding for a protracted battle over trade, technology and economic hegemony with the United States. A move of that magnitude is considered quite large in the currency markets. But it was especially notable for the renminbi, which China has kept from crossing 7 for more than a decade. The decision to let the currency’s value fall was widely viewed as a signal that Beijing was girding for a protracted battle over trade, technology and economic hegemony with the United States.
[Why the number 7 makes China’s currency a trade weapon.]
The People’s Bank of China, in a bluntly worded statement on Monday, tied the currency’s dip to Mr. Trump’s “unilateralism and trade protectionism measures and the imposition of increased tariffs on China.”The People’s Bank of China, in a bluntly worded statement on Monday, tied the currency’s dip to Mr. Trump’s “unilateralism and trade protectionism measures and the imposition of increased tariffs on China.”
The continuing trade battle between the world’s two largest economies has slowed the global economy. And investors are acutely worried that it could begin to weigh on the less trade-dependent American domestic economy, which is experiencing its longest-ever expansion. Also on Monday, the state-run Xinhua News Agency reported that Chinese enterprises had stopped making new purchases of American agricultural products, citing Mr. Trump’s plan to further increase tariffs on China as a “serious violation” of the consensus reached when he and Mr. Xi met in Osaka, Japan, in June.
Unemployment remains at a 50-year low in the United States, but there are reasons for concern. The pace of both economic and job growth have slowed in recent months. Business investment has been negative. On Monday, a key gauge of the services sector’s strength fell to its lowest level since late 2016. The apparent escalation in the dispute between Washington and Beijing hammered share values across markets. Prices for commodities like copper, lead and iron, which are typically linked to the outlook for Chinese and global growth, fell.
Signs of economic softness have pushed investors to buy up government bonds, raising prices and driving yields, which move in the opposite direction, down sharply this year. Signs of economic softness also pushed investors to buy up government bonds, raising prices and sharply driving down yields, which move in the opposite direction. On Monday, the yield on the 10-year Treasury note hovered near 1.74 percent.
The market declines on Monday undercut hopes for a quick rebound from the selling of last week — the S&P 500’s worst of the year. The poor performance came even as the Federal Reserve delivered a widely expected decision to cut its key monetary policy target rate by a quarter of a percentage point. The drop in long-term government bond yields suggests that investors are again downgrading their views of the economy. And in recent days, a sharp drop in yields on long-term government bonds pushed them still farther below those of shorter-term government debt, an unusual situation known as an inversion of the yield curve.
The tone struck by Jerome H. Powell, the Fed chair, at a news conference after the decision, however, appeared to underwhelm investors, who wanted to hear that policymakers were ready to continue cutting rates in the coming months. Mr. Powell’s description of the cut as a “mid-cycle adjustment to policy” suggested to some people that the central bank viewed rate cuts as temporary and tactical, rather than the start of a longer-term push. An inverted yield curve is considered one of the most reliable, although not particularly timely, leading indicators of recession. The yield curve has inverted before every recession of the past 60 years, with an economic downturn occurring an average of 18 months to two years later.
On Monday, the deepening inversion of the yield curve provoked new worries about the durability of the current business cycle.
It is widely accepted that the battle between the world’s two largest economies has slowed the global economy, but investors are increasingly worried that it could begin to weigh on the less trade-dependent American domestic economy, which is experiencing its longest-ever expansion.
Unemployment remains at a 50-year low in the United States, but there are reasons for concern. The pace of both economic and job growth have slowed in recent months. Business investment has turned negative. On Monday, a key gauge of the services sector’s strength fell to its lowest level since late 2016.
JPMorgan Chase economists published a note saying that by some models, the risk of recession starting within a year is now 40 percent, based on the yield curve.
The concerns have also crept into the stock market. On Monday, the Russell 2000 index of small stocks, weighted toward more of the kind of domestically focused companies that had been insulated from the trade battle, was also battered, dropping 3 percent.
The pain was worse for companies with particularly close ties to China. Wynn Resorts, which relies heavily on casino operations in Macau that cater to gamblers from mainland China, was among the worst-performing stocks in the S&P 500, tumbling 7.2 percent. The electronics retailer Best Buy, which gets many of the products it sells from China, dropped 3.5 percent.
Technology stocks made up the hardest hit section of the market, falling roughly 4 percent. The tech giants Microsoft (3.4 percent) and Apple (5.2 percent) both dropped sharply.
Selling was also heavy in shares of computer chip makers, which generate significant revenue from sales to technology manufacturers based in mainland China. Nvidia fell 6.5 percent, and Micron Technology dropped more than 4.9 percent. An index of semiconductor stocks fell 4.4 percent.
[Why the number 7 makes China’s currency a trade weapon.]
The market declines seemed to undercut hopes for a quick rebound from the selling of last week — the S&P 500’s worst of the year. The poor performance of last week came even as the Federal Reserve delivered a widely expected decision to cut its key monetary policy target rate by a quarter of a percentage point.
But the tone struck by Jerome H. Powell, the Fed chair, at a news conference after the decision appeared to underwhelm investors, who wanted to hear that policymakers were ready to continue cutting rates in the coming months. Mr. Powell’s description of the cut as a “mid-cycle adjustment to policy” suggested to some people that the central bank viewed rate cuts as temporary and tactical, rather than the start of a longer-term push.
“You’ve got trade policy escalating; you’ve got Fed policy uncertainty,” said Dan Clifton, a partner at Strategas Research Partners, a financial and economic consulting firm, adding that the market was “basically de-risking until you get clarity on really either one of those issues.”“You’ve got trade policy escalating; you’ve got Fed policy uncertainty,” said Dan Clifton, a partner at Strategas Research Partners, a financial and economic consulting firm, adding that the market was “basically de-risking until you get clarity on really either one of those issues.”