Markets Focused On Escalating Trade War Between US And China

• NASDAQ Composite -0.01% Dow -0.63% S&P 500 -0.25% Russell 2000+0.33%
• NASDAQ Advancers: 1217 Decliners:1032
• Today's Volume (100 day avg) -32%

Following weakness in Asia and Europe markets in the US opened solidly lower this morning but are off the lows.  The focus today is the trade war between the US and China that escalated on Friday and little changed over the weekend though talks continue.  The R2K is the only major index in the green, most sectors are lower with Consumer Staples (-1.4%) and Healthcare (-1.2%) underperforming while Energy (+1.1%) leads.  Crude oil traded 0.4% higher on word that OPEC production increases might not be as aggressive as initially thought.

• Frank Bavaro of North South Capital discusses a Barron's article concerning the escalating trade/tariff war between the U.S. and the world in its article "How Investors Can Protect Themselves in a Trade War." Barclays is also 'modestly optimistic' that negotiators will work out trade deals that don't result in drastic new tariffs, but Maneesh Deshpande, head of equity derivatives, doesn't think that means the risk isn't substantial. "It's a little bit puzzling" that the market doesn't appear to be taking those risks into account, he says. "The market is not that worried about things actually getting worse. Clearly from a factual perspective things are certainly worse. They've ratcheted up to a certain extent." Barclays still expects the S&P 500 to end the year at 2,900, but "an escalation of the trade rhetoric would be the main downside risk to our optimistic view." The most damaging potential tariffs-particularly among the Nafta countries-are likely to focus on the auto industry.  The U.S. imports $320 billion worth of vehicles and parts, representing 14% of total goods imports.  Half of that comes from Canada and Mexico, according to Joseph Quinlan, head of market strategy at U.S. Trust.
• Earnings season begins three weeks from Friday and the WSJ writes that the 'peak earnings' thesis remains intact with earnings growth expected to slow from 25% in 1Q17 to single digits next year. When combined with rising rates and a potential trade war, the Journal notes that the market currently support a "rosy outlook that is already showing signs of fading."  The article points out that not all agree that earnings will decline given strong consumer spending and a healthy employment market, but it  also points out that the SPX is up just 4% YTD versus 8.7% for the same period last year.

Technical Take :

Emerging markets are leading to the downside amongst global equities as the group faces headwinds from geopolitical uncertainty and an escalating trade war between the US and China.  The group is also negatively exposed to the strengthening US dollar which acts as an increasing cost for borrowers of dollar-denominated debt.  Over the last three months the emerging market ETF (ticker EEM) has been experiencing resistance from its 50-day simple moving average (sma), which had previously acted as clearly defined support on numerous occasions throughout 2017.  After death crossing two weeks ago down below the 200-day sma, today the EEM broken down below the key price level of $45 which had previously acted as support on three occasions since December 2017.  After gaining 35% in 2017, the EEM has given back more than 14% from its January 2018 highs.  There is long term support at the $44.18 level representing the prior high from 2015, however a downside acceleration could ensue if that level fails to hold.