U.S. Opening Bell: Metals Sink, Global Shares Drop On New Tariff Threats

Global stocks, Treasury yields and industrial metals took a hit this morning after US President Donald Trump's administration yesterday threatened to slap additional tariffs on as much as $200B worth of Chinese goods, re-igniting investor fears of a full-fledged trade war. The latest levies would affect a broad array of consumer goods including tuna, salmon, dog leashes, tires and luggage.

Asian markets and the Chinese yuan bore the brunt of the widespread flight to safety, which abruptly halted the global equity rally of the last few days. Futures on the S&P 500, Dow and NASDAQ 100 are all sliding lower, confirming the abrupt shift to risk-off trading.

Still, despite the increased likelihood of added volatility, we believe the broader US uptrend will remain intact given the diverging pattern between US and Chinese shares since the trade dispute began. While China's Shanghai Composite entered a bear market and the renminbi remains in a downtrend, US indices are in a bull market, trading close to their record highs. If investors are able to hang on for the next few weeks, in order to see if earnings meet their high expectations, we could yet see US benchmarks hit new record highs.

The pan-European STOXX 600 Index slumped a full percent this morning, ending a six-day straight rally, with all sectors in the red. Shares of companies most reliant on overseas markets for growth took the brunt of the losses. Basic resources plunged 2.6 percent and car makers dropped 1.5 percent.

The FTSE fell 1.1 percent on Wednesday with losses spread throughout all sectors. With the drop in commodity prices, mining stocks helped pull the London stock exchange further into the red.

London-listed BHP Billiton (LON:BLT) was down 2.7 percent on Wednesday while Rio Tinto (LON:RIO) fell 3.4 percent. Rio Tinto faced added pressure from violent protests in South Africa that have caused one of its SA operations to have been closed since Friday. Glencore (LON:GLEN) was pulled lower on the news the company had set up a committee to handle the subpoena from the US DoJ to hand over documents from business in the Democratic Republic of the Congo, Nigeria and Venezuela. Glencore was down 3.9 percent mid-session.

Japan’s TOPIX slumped over 1.5 percent initially, but rebounded during the second hour, trimming the setback by nearly half, to 0.8 percent, though still ending a three-day advance. China’s Shanghai Composite pared an initial 2.65 percent plunge to 1.8 percent. Unlike the TOPIX, which trended higher with the rebound, the Chinese benchmark ranged.

Along with regional indices, the Chinese yuan also fell, losing 0.4 percent after trimming an initial 0.7 drop. This is the second day of the currency's selloff, for an aggregated 0.66 percent loss. Technically, the USD/CNY pair provided an upside breakout to a bullish pennant pattern.

Hong Kong’s Hang Seng trimmed a 2.4 percent collapse to a 1.55 percent loss, finding demand at the 28,000 level, a support since October 2017. South Korea’s KOSPI initially slid 1.35 percent but it too trimmed losses, to 1.6 percent.

Australia’s S&P/ASX 200 declined almost 0.7 percent, extending Tuesday’s fall to an overall 1.10 percent setback. Technically, this is considered a correction within an uptrend, a return-move to Friday’s upside breakout of a bullish pennant. The mechanics that make up a return move following a breakout—where traders who are long take profits and short are squeezed—may explain why the Australian gauge, which has lately been rising even as Asian market peers were selling off, was the only benchmark to fall without any rebound.

h2 Global Financial Affairs/h2

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The return of trade war jitters generated a rush back to the security of Treasurys. Yields on the 10-year note dropped a full percentage point. However, the safe haven yen weakened against the dollar, as there is no BoJ tightening in sight.

Today’s risk-off mood follows yesterday's exuberant US session, in which equities rose to their highest in almost a month, with additional technical milestones achieved.

The S&P 500 gained 0.35 percent, hitting its highest close since February 2. However, the two sectors that outperformed were growth oriented, Consumer Staples (+1.19 percent) and Utilities (+0.95 percent), signaling that traders are managing their fears even as they bid up prices. Yesterday's trading overcame the preceding, mid-June peak, at 2791.47, confirming an uptrend since April 3, just 3.8 percent from the benchmark's record high.

The Dow Jones Industrial Average rose 0.6 percent, for a fourth straight day, with an aggregate advance of 3.1 percent, to its highest level in 3 weeks. The NASDAQ Composite added less than 0.05 percent of value, after paring back from a 0.2 percent higher open. Still, it was the fourth daily advance for the tech heavy index, which closed just 0.6 percent below its all-time high.

Perhaps the most reliable sign that traders are ready to put aside their trade concerns was the underperformance of the Russell 2000. The small cap index, whose listed companies have a domestic focus, bucked the trend, falling 0.53 percent, ending five-day advance. This trimmed an aggregate gain of 3.8 percent to 3.2 percent, albeit after registering an all-time intraday high.

The slide that followed could indicate a double-top in the making, with the 50 DMA "guarding" the neckline. As well, the RSI provided a negative divergence.

Metals have borne the brunt of today's flight to safety on added trade fears, with copper, nickel and zinc all sinking. Oil dropped below $74 a barrel in New York, even as an industry report was said to show shrinking U.S. crude stockpiles. Nevertheless, seven regional events are likely to drive the price of oil higher in the longer term.

h3 Up Ahead/h3

• The UK government will publish its White Paper on its future relationship with the EU on Thursday.

• Earnings season begins with JPMorgan Chase & Co (NYSE:JPM). and Citigroup Inc (NYSE:C) reporting results on Friday.

• The most noteworthy US data may be the June inflation report on Thursday. Consensus expects it will show both headline and core growth picking up. There’s another deluge of Treasury debt sales too, with a total $156 billion of notes and bills offered.

• Chinese trade data due at the start of the next week will probably show slightly slower export growth after early indicators pointed to softer overseas demand and weaker export orders, Bloomberg Economics said.

h2 Market Moves/h2

Stocks

• The U.K.’s FTSE 100 declined 1.1 percent.

• Futures on the S&P 500 were down 0.8 percent after dropping as much as 1.1 percent earlier.

• The Stoxx Europe 600 Index retreated 0.8 percent.

• Japan’s TOPIX dropped 0.8 percent.

• Hong Kong’s Hang Seng fell 1.6 percent and the Shanghai Composite lost 1.8 percent.

• South Korea’s KOSPI dropped 0.6 percent.

Currencies

• The British pound dropped 0.2 percent to 1.3244.

• The Dollar Index is flat.

• The Japanese yen was flat at 111 per dollar, compared with 111.27 before the tariff report came out.

• The offshore yuan fell 0.4 percent to 6.67 per dollar.

• The euro edged 0.1 percent lower to $1.1729.

Bonds

• The yield on 10-year Treasuries slipped about one basis point to 2.84 percent.

Commodities

• West Texas Intermediate crude slid 0.4 percent to $73.81 a barrel.

• Gold lost 0.3 percent to $1,251.88 an ounce.