As we saw on Friday, the US stock market has been prone to violent swings. Investors continued to digest mixed bank earnings reports and increasing volatility in the US-China trade relationship. The Dow Jones Industrial Average fell by 232 points, representing a decline of 0.6%, as of approximately 3:35 PM CEST. The tech-heavy Nasdaq composite quickly followed, losing 0.1%, and the broad-based S&P 500 index was off 0.4% in early trade.
A perfect storm of factors have led to the current uncertainty in the market. Disappointing earnings reports from the big banks, along with a surprise deepening of the trade war with China, have quickly eroded investor confidence. In this regard, financial institutions showed a duality of outcomes. JPMorgan Chase soared 1.6% while Morgan Stanley dipped 0.2%. Wells Fargo fared worse, dropping by more than twice that—3%—after announcing its own cuts.
Bank Earnings and Market Reactions
Investors were intently focused on the last weeks of earnings from some of the country’s biggest financial institutions this week. JPMorgan Chase’s positive performance stood in stark contrast to its peers, which struggled to maintain investor confidence.
That small decline from Morgan Stanley is indicative of the nervousness in the banking space. Recession forecasts are hanging like a dark cloud over investors’ minds. Wells Fargo’s large drop should sound alarm bells. This steep drop raises questions regarding the bank’s operational efficiency and impending impacts as a result of increased regulatory oversight.
Market analysts are still sifting through these announcements, but most agree that strong earnings will be necessary to bring back a sense of confidence to investors. These mixed results might be the first troubling sign that the recovery is not as robust as once imagined.
Currency Fluctuations
Along with the volatility in the stock market, the strength of the US dollar fell sharply against a number of other major currencies. Indeed the dollar has tumbled against the euro, the Japanese yen and the Canadian dollar. This drop in investments has made the competitive landscape even more complicated.
These currency shifts are sometimes impressionistic harbingers of more general economic sentiment and may themselves affect trade flows. Yet the depreciation of the dollar is a source of deepening concern about inflation and loss of dollar purchasing power for American consumers and businesses.
Given these ongoing shifts, public market investors and others are advised to keep a watchful eye as the landscape continues to change. Analysts point out that currency values can have an outsized effect on multinational corporations’ profitability and their stock valuations.
Rising Treasury Yields and Commodity Prices
U.S. Treasury yields have surged. The yield on the 10-year Treasury shot up over this period, reaching 4.50%. This is up from 4.40% late Thursday and well above the 4.01% registered at the end of last week. First, this sharp increase in yields almost always indicates that investors are anticipating inflation or Federal Reserve interest rate increases.
During this same period, gold prices went up over 2%, up to $3,250 per ounce. This dramatic surge is a testament to a flight to quality during which investors are looking for calm amid market turbulence and uncertainty.
Rising yields and rising commodity prices interact with each other in fascinating ways. This new dynamic affects the latter change by showing how investors react to economic indicators.
Trade Tensions with China
To further complicate the day’s confusion, China surprised us all by raising its own tariffs on US exports to 125%. This ruling comes amidst ongoing high-level trade talks between the two countries. Instead, it showcases heightened tensions that could further poison trade relations.
The unusual public blasted a Chinese Finance Ministry spokesman over the affair. He said, “In imposing an unusually high rate of tariffs on China, the US is trying to play a numbers game, which has no real economic meaning. It will be pure humors in world economy history.”
The spokesman’s warning was particularly ominous. In his words, if the US does not stop encroaching on China’s red lines, China will fight back decisively and fight till the end. This new hard-line rhetoric serves as a further reminder of the increasing economic hostility between the two world powers and what it may mean for international markets.
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