US Markets

Stock Futures Plunge as Recession Fears Intensify

Wednesday, August 14, 2019

U.S. stock futures plummeted ahead of trading on Wednesday after a key Treasury yield curve inverted signaling an impending recession. The yield on the 10-year Treasury note slipped below the 2-year rate. Traditionally, this is believed to be a reliable indicator that a recession is around the corner. A flight toward safe haven assets led to the yield on the 30-year Treasury bond falling to a record low.

Consequently, the Dow threatens to lose around 400 points at the start of trading itself. Other worrying economic cues surfaced, with China’s industrial output increasing at its slowest pace in 17 years for the month of July. The country’s retail sales growth was also weaker than expected. Meanwhile, European stocks declined following the release of dismal German and Eurozone second-quarter GDP numbers.

Ahead of the opening, retailer Macy’s M missed second-quarter earnings and revenue estimates. Meanwhile, Cisco Systems CSCO and Agilent Technologies A are slated to report fiscal fourth-quarter and fiscal third-quarter earnings, respectively.

U.S. stocks rebounded significantly on Tuesday after the United States Trade Representative’s (USTR) office decided to delay new tariffs on Chinese goods from Sep 1 to Dec 15. Moreover, the USTR also decided to exclude certain product categories from tariffs. All three major stock indexes closed sharply higher.

The Dow Jones Industrial Average (DJI) surged 1.4% or 372.54 points to close at 26,279.91. The S&P 500 soared 1.5% to close at 2,926.32. Meanwhile, the Nasdaq Composite Index closed at 8,016.36, jumping 2%. The fear-gauge CBOE Volatility Index (VIX) declined 16.9% to close at 17.52. A total of 7.95 billion shares were traded on Tuesday, higher than the last 20-session average of 7.34 billion. Advancers outnumbered decliners on the NYSE by a 2.46-to-1 ratio. On Nasdaq, a 2.30-to-1 ratio favored advancing issues.

The Dow closed in positive territory after two straight days with 28 components of the 30-stock blue-chip index closing in the green while two finished in the red. The S&P 500 also closed in positive territory after two consecutive days. The Technology Select Sector SPDR (XLK) and Consumer Discretionary Select Sector SPDR (XLY) gained 2.5% and 1.7%, respectively.

Notably, all 11 sectors of the benchmark index closed in the green. The Nasdaq Composite finished in the green reversing losses of two successive days due to strong performance from large-cap tech stocks.

The United States Trade Representative (USTR) office said that new tariffs on certain Chinese consumer goods will be delayed by two and half months. Notably, on Aug 1, President Donald Trump had tweeted that he was going to impose 10% tariff on additional Chinese goods worth $300 billion effective Sep 1.

However, within two weeks of Trump’s tweet, the USTR has said that the new set of tariffs will not be imposed before Dec 15. The products on which tariffs will be delayed include certain consumer electronics like cellphones, laptops and video game consoles, food and kitchen items, several chemicals, fireworks, baby products and sports equipment. Tariffs will also be delayed on some apparel, footwear and toys. Notably, other items will be completely excluded from the tariff list although the list of those products is yet to be released.

The Trump administration cited “health, safety, national security and other factors” as reasons for omitting these products from the tariff list. Trump said his government was delaying tariffs on certain items in order to safeguard consumer sentiment during the upcoming holiday shopping

Consequently, shares of Apple Inc. AAPL, Best Buy Co. Inc. BBY and Hasbro Inc. HAS surged 4.2%, 6.4% and 2.8%, respectively. Hasbro sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Trade negotiations with China restarted after President Trump abruptly ended the cease-fire with China on Aug. 1. On Aug 13, China’s official news agency Xinhua quoted China's Ministry of Commerce as stating that the country’s vice premier Liu He had a telephonic discussion with U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin about trade issues. Per Xinhua, these talks will be held again in two weeks.

The Department of Commerce reported that consumer price index (CPI) for the month of July jumped 0.3% after a 0.1% increase in June. The figure was in line with the consensus estimate. CPI increased 1.8% over the last 12 months compared with the 1.6% increase over the same period experienced in June.

Core CPI (excluding food and energy costs) also grew 0.3% in July, flat with the previous month but higher than the consensus estimate of a growth of 0.2%.  Over the last 12 months, core CPI increased 2.2% compared with the 2.1% increase in June, marking its highest gain in six months.

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