US stocks closed sharply higher on Tuesday, as the market rebounded from its worst performance of the year on Monday. That said, none of the three major stock benchmarks managed to fully recoup their losses.
Both the S&P and the Nasdaq recorded their first positive close in seven days.
The CBOE Market Volatility Index, which was up more than 30% on Monday, came down 19%.
In the Dow, Nike (NKE), Walt Disney (DIS) and United Technologies (UTX) led gainers. Disney will report earnings after the closing bell.
Airplane parts manufacturer TransDigm (TDG) and video game company Take-Two (TTWO) were the best performers in the S&P after they reported second quarter earnings.
US stocks are sharply higher with less than an hour left in the trading day.
The Dow is up 1%, or nearly 250 points. The S&P 500 and the tech-heavy Nasdaq Composite have gained 1.1% and 1.3%, respectively.
All three indexes are on track to snap multi-day losing streaks.
But despite their solid performance, none of the three stock benchmarks is close to retracing Monday’s losses, when all three logged their worst day of the year.
The US dollar climbed to its strongest level since the financial crisis against China’s yuan on Monday, sparking worries that the trade war between Beijing and Washington could turn into a currency war.
But the yuan — which only trades in a predefined range set by Chinese authorities — isn’t the only currency that has paled against the buck of late.
The Korean won is at its lowest since early 2016 against the greenback, and the Taiwan dollar is at its lowest since early 2017. Export-driven Asian emerging markets currencies have been battered by the trade war, because their economies are reliant on the US-China trade complex.
On top of that, the US is the strongest currency on the block right now, and it has been for a while. The ICE US Dollar Index is up 1.5% this year.
The reason is simple: The US economy is doing better than its rivals. That is why during a prolonged trade war or a global slowdown, US assets would likely suffer the least (although they would also feel pain).
Outside of emerging markets, major dollar rivals, like the euro or the British pound, have their own worries as well, thanks to sluggish growth in Europe, worries about global trade and Brexit.
The deepening trade war between the United States and China could deal a double shock to the fragile oil market.
The tit-for-tat tariffs have already sent crude prices plunging because of fears of a severe global economic slowdown, or even recession in the United States, that could dent already anemic demand for oil.
But there could also be a supply shock coming. Bank of America Merrill Lynch (BAC) warned that China could retaliate against US tariffs by purchasing vast amounts of oil from Iran in defiance of Washington’s sanctions on the OPEC nation.
The one-two punch would cause Brent oil to crash from $60 a barrel today to just $40, Bank of America wrote in a note published on Friday.
The trade war between the United States and China has sharply intensified in recent days, raising the risk that the bruising battle will drag on through the 2020 presidential election.
Goldman Sachs (GS) warned clients on Monday that a trade agreement “now looks far off,” because officials in Washington and Beijing are “taking a harder line.”
The Wall Street firm said the most likely outcome is that no deal will be reached before the 2020 election, and that President Donald Trump’s threatened 10% tariffs on $300 billion of US goods will remain in place on Election Day.
Stocks rebounded a bit Tuesday after Monday’s massive trade war-induced slide. And one fund manager is worried that investors are once again getting too complacent about what’s next for the markets and global economy.
Anthamatten is worried that investors have yet to factor in the negative impact of the US-China trade tension and slumping economies around the world on corporate profits.
According to FactSet, analysts are expecting earnings for S&P 500 companies to surge nearly 11% in 2020 and that sales will be up more than 5%. But Anthamatten said that analysts will probably have to cut these forecasts drastically.
He thinks profits will only rise about 4% to 5% and that revenues will be up in line with the growth of US GDP – i.e. the low single digits.
And if that happens, investors will start to worry about the market looking overvalued.
The flare-up in trade tensions has sparked nearly $3 billion in outflows from emerging markets since Monday, according to the Institute of International Finance.
It gets worse: Since last Friday — the day after President Donald Trump vowed to impose tariffs on nearly all of China’s exports to the United States starting in September — $5.5 billion has flowed out of emerging market stocks and bonds.
More: Chinese stocks saw nearly $1 billion in net outflows on Friday alone.
Monday’s steep drop in the markets isn’t that worrying, according to economist Dryden Pence.
He told CNN’s Julia Chatterley that stocks’ steep drop is part of the “normal battle rhythm” of the market. Dryden, the chief investment officer of Pence Capital Management, expects the markets to go back up following earnings and the economy’s strong framework.
“The American consumer is making more money then they have ever made. More people are working than they ever have and that is 70% of the [US] economy,” he said. “That’s driving this underpinning of a decent foundation.”
The Dow and the broader stock market are rebounding Tuesday, after China took steps to ease the budding currency war with the United States.
China priced the yuan’s reference rate at 6.9683 to the dollar on Tuesday, a hair above the key 7:1 ratio to the US dollar. Although that was the weakest level for the yuan in 11 years, many Wall Street investors feared China would price the yuan below that psychological 7:1 barrier.
The managed yuan continued to slide Tuesday, but the pace of its decline slowed. One dollar last bought $7.0188 yuan in China, and 7.0515 yuan in the offshore market, where the currency trades more freely.
Late Monday. the United States labeled China a currency manipulator.
But the sentiment is better nonetheless.
The Dow traded as much as 200 points, or 0.8%, higher Tuesday morning, while the S&P 500 bounced 0.9% higher. The tech-heavy Nasdaq Composite, which was hit worst in Monday’s selloff, traded 1.3% higher.
Stock investors also took comfort in the Chinese central bank announcing plans to issue central bank bills worth 30 billion yuan next week. That supported China’s currency, which bounced back slightly against the dollar after the announcement.
US stocks opened higher, rebounding from their worst losses in 2019.
What happened? China on Tuesday fixed its currency reference level above the important 7:1 ratio against the US dollar. This was seen as Beijing walking back Monday’s devaluing, which threw global markets into turmoil. Meanwhile, Washington labeled China a currency manipulator.
On Monday, all three benchmarks registered their worst one-day drops of the year.
The United States and China both have reasons to de-escalate the trade war.
While Beijing is worried about capital outflows and the implications of weaker exports on its economy, Washington’s Achilles’ heel is the stock market, wrote Robin Brooks, chief economist at the Institute of International Finance, in a tweet.
US investors last fretted about currency devaluation from China in August 2015. In lockstep, the S&P 500 posted a 6.3% decline that month.
It is too early to tell how this year’s August will go, but if the devaluation worry continues to weigh on investors’ minds, it could be a rough month for the blue-chip stock index.
Trade wars are not easy to win. And they are hard to stop.
It’s a lesson investors are re-learning this week. An escalation of the US-China trade war has dragged the Dow and the S&P 500 down 6% from recent record highs, the Nasdaq down more than 7%.
Here’s the play-by-play: After fruitless trade talks in Shanghai last week, President Donald Trump declared new tariffs of 10% on $300 billion in Chinese-made goods. (Think tennis shoes, clothing, toys, and consumer electronics, until now shielded from tariffs to minimize the cost to American consumers.)
China responded by guiding its currency to the lowest level in a decade, and barring its companies from buying US agriculture products. The Trump Administration retaliated late Monday by declaring China a currency manipulator. China shot back: No, it is not.
Trade wars are messy and unpredictable. And there is no end in sight.
Goldman Sachs informed its clients it now expects the trade war to last until the next election in 2020. Goldman told clients the Fed will need to cut interest rates another 25 basis points to stabilize the economy amid all the trade damage.
The Wall Street Journal editorial board this morning warned the president’s trade war has now become a currency war, introducing new risk to global growth:
Stocks in Asia clawed back some of their losses after China took steps to shore up the falling yuan.
Major Asian markets still ended Tuesday in the red:
But they recovered significantly from earlier in the day, when all of those indexes fell by more than 2%.
Those gains also marked a big turnaround from Monday’s major selloff, when US markets suffered some of their biggest drops of the year.
US stocks are poised to recover some of their losses Tuesday coming off their worst day of the year.
European stocks were mixed Tuesday amid rising trade frictions between the United States and China. But the Swiss franc continues to strengthen as the conflict escalates.
The German DAX index was up 0.5% in morning trade in Frankfurt, while the FTSE 100 in London was flat. France’s CAC 40 advanced 0.7%.
The Swiss franc — a safe haven in times of global tumult — hit its highest level against the euro in two years. As of mid morning, one euro bought 1.09 Swiss francs, breaking through what the markets consider a physiologically important mark of 1.10 Swiss francs.
A weaker Chinese yuan will have a negative impact on the currencies of emerging markets, according to Rajiv Biswas, IHS Markit’s chief economist for Asia.
Investors had been already been increasingly wary about buying into those currencies, particularly because of the escalating US-China trade war and recent moves to ease monetary policy in countries such as South Korea, Malaysia, Philippines and Indonesia.
Now, “the yuan’s slide against the US dollar will reinforce negative sentiment in global financial markets towards emerging markets currencies,” Biswas wrote in a research note.
A weaker yuan will make Chinese exports cheaper, which in turn could hurt exports in emerging markets that compete with China in manufactured goods, he said. Central banks in Asia may now respond with another round of interest rate cuts.
China is pushing back hard against US claims that it’s manipulating the currency to gain a competitive trade advantage, and is accusing the US of escalating the trade war.
It said Monday’s devaluation reflected pressure on the exchange rate stemming from the US decision last week to impose new tariffs on Chinese exports.
In a statement late Monday, the People’s Bank of China Governor Yi Gang responded to accusations that the country is working to devalue the yuan, saying:
On Tuesday, in its third statement in the past two days, the PBOC expressed deep regret that the US had labeled China as a “currency manipulator.”
China’s central bank has several tools for managing its currency. They include mandating the amount of cash that Chinese banks must hold in reserve and adjusting its vast foreign exchange stockpile.
The People’s Bank of China (PBOC) also sets interest rates, which can affect the value of its currency.
But the central bank doesn’t operate independently from the Chinese Communist Party, and it answers to the government.
“The PBOC is still a major player in the foreign exchange market,” Aidan Yao, a senior economist at money manager AXA Investment Managers, told CNN Business last year. “You don’t really see that same kind of intervention with the Fed, European Central Bank or the Bank of Japan.”
The currency spat between the United States and China won’t be helpful when it comes to resolving the two countries’ ongoing trade issues.
While the designation is “mostly symbolic” and has “limited practical implications,” the decision is still expected to worsen tensions, he added.
American and Chinese negotiators met for the latest round of trade talks in Shanghai last week. Afterward, both sides said that the meetings were “constructive,” but offered few signs of real progress.
Tai Hui, JPMorgan’s chief market strategist for asset management in Asia, also noted Tuesday that the US move to label China as a currency manipulator marked “another major setback to the possibility of a trade agreement.”
Washington is set to host the next round of talks in early September, but expectations for a breakthrough remain low.
“Currency wars are taking center stage,” says Edward Moya, a senior market analyst at Oanda.
Moya wrote in a note Tuesday that the United States can be expected to respond to China’s currency drop with more “verbal intervention,” though he believes it’s unlikely that we’ll see a shift toward a weaker dollar policy.
Moya predicts:
