Wall St. drops on surprise Mexico tariff threat

Traders work on the floor of the New York Stock Exchange (NYSE) shortly after the opening bell in New York, U.S. May 31, 2019. REUTERS/Lucas Jackson

By Chuck Mikolajczak

NEW YORK (Reuters) – U.S. stocks dropped on Friday, putting the S&P 500 on track for its first monthly drop of the year after President Donald Trump’s surprise threat of tariffs on Mexico fueled fears increasing trade wars could lead to a recession.

Washington will impose a 5% tariff from June 10, which would then rise steadily to 25% until illegal immigration across the southern border was stopped, Trump tweeted late on Thursday.

Mexican President Andres Manuel Lopez Obrador responded by urging his U.S. counterpart to back down.

“Mexico would probably like to work something out but I don’t think they even know what to work out,” said Tim Ghriskey, Chief Investment Strategist at Inverness Counsel in New York.

“It’s impossible to handicap Trump because something can come out of left field like this and something can go away just as quickly.”

The Dow Jones Industrial Average fell 315.97 points, or 1.26%, to 24,853.91, the S&P 500 lost 33.82 points, or 1.21%, to 2,755.04 and the Nasdaq Composite dropped 97.59 points, or 1.29%, to 7,470.12.

Wall Street’s main indexes are down more than 6% in May, as investors have become increasingly worried about deteriorating trade talks between the U.S. and China trade war and have sought safety in government bonds. Technology and energy have been among the hardest hit sectors since May 3 as Trump ramped up tariff threats with Beijing.

U.S. Treasury yields fell to new multi-month lows. Benchmark 10-year yields dropped as low as 2.145 percent, the lowest since September 2017.

The yield curve, as measured in the gap between three-month and 10-year bond yields, remained deeply inverted. An inversion in the yield curve is seen by some as an indicator that a recession is likely in one to two years.

Of the 11 major S&P sectors, only defensive plays utilities and real estate were the two on the plus side while eight were showing drops of more than 1%.

U.S. carmakers and manufacturers were among the worst hit. General Motors Co dropped 4.16% and Ford Motor Co 2.67%, pushing the consumer discretionary sector 1.43% lower.

Adding to the downbeat mood was Beijing’s warning on Friday that it would unveil an unprecedented hit-list of “unreliable” foreign firms, as a slate of retaliatory tariffs on imported U.S. goods was set to kick in at midnight. Tariff-sensitive industrials declined 1.36%.

Data showed U.S. consumer prices increased by the most in 15 months in April, but a cooling in spending pointed to a slowdown in economic growth that could keep inflation pressures moderate.

The report from the Commerce Department supported the Federal Reserve’s contention that recent low inflation readings were transitory.

Among other stocks, Gap Inc tumbled 10.75%, the most among S&P 500 companies, after the apparel retailer cut its 2019 profit forecast.

Constellation Brands, which has substantial brewery operations in Mexico, slid 6.50%.

Declining issues outnumbered advancing ones on the NYSE by a 2.52-to-1 ratio; on Nasdaq, a 3.20-to-1 ratio favored decliners.

The S&P 500 posted 4 new 52-week highs and 52 new lows; the Nasdaq Composite recorded 12 new highs and 210 new lows.

(Reporting by Chuck Mikolajczak; Editing by Chizu Nomiyama)

S&P 500 closes near record high as earnings season begins in earnest

FILE PHOTO: Traders work on the floor at the New York Stock Exchange (NYSE) in New York, U.S., April 9, 2019. REUTERS/Brendan McDermid/File Photo

By Stephen Culp

NEW YORK (Reuters) – U.S. stocks closed near record highs on Friday after the largest U.S. bank, JPMorgan Chase Co, soothed worries that the first-quarter earnings season would dampen Wall Street’s big rally back from last year’s slump.

The S&P 500 is now within a percent of September’s record closing high, and the S&P 500 Total Return Index, which includes reinvested dividends, in fact regained record levels, recovering ground lost after a punishing sell-off in the closing months of the year which brought the benchmark index within a rounding error of bear market territory.

Since then, the three major indexes notched their best quarterly gains in nearly a decade in the first quarter, but have spent April in a holding pattern ahead of first-quarter earnings season.

JPMorgan, effectively jump-starting the quarterly earnings reporting season that will dominate investor sentiment in coming weeks, blew past analyst estimates, easing fears that slowing economic growth could weigh on its results. Its stock rose 4.7% and led a broad rally in bank stocks.

“JPMorgan earnings are important because their operation touches on a wide portion of the economy,” said David Carter, chief investment officer at Lenox Wealth Advisors in New York. “It’s a bellwether for other corporate earnings.”

Analyst now expect S&P 500 companies to show a 2.3% year-on-year decline in earnings, slightly improved from their last reading, per Refinitiv data. But first-quarter profit is still seen logging its first annual contraction since 2016.

However, of the 29 companies in the S&P 500 that have reported thus far, 79.3% have come in above analyst expectations.

Walt Disney Co jumped 11.5% to an all-time high, providing the biggest boost to the Dow and the S&P 500 after pricing its upcoming streaming service.

Streaming rival Netflix Inc slid 4.5%.

The Nasdaq and the Dow are both about 1.5% below their previous record highs.

For the week, both the S&P 500 and the Nasdaq showed their third straight gains, while the Dow posted a nominal weekly loss.

The Dow Jones Industrial Average rose 269.25 points, or 1.03%, to 26,412.3, the S&P 500 gained 19.09 points, or 0.66%, to 2,907.41 and the Nasdaq Composite added 36.81 points, or 0.46%, to 7,984.16.

Of the 11 major sectors in the S&P 500, all but healthcare ended the session in positive territory.

Financials were the largest percentage gainer, rising 1.9% on the back of JPMorgan Chase earnings.

Healthcare stocks extended their slide, with UnitedHealth Group down 5.2%, Anthem Inc dropping 8.5% and Humana Inc off 2.8%. The S&P 500 Healthcare index slipped 1.0%.

In the largest energy deal since 2016, Chevron Corp said it would buy Anadarko Petroleum Corp for $33 billion in cash and stock.

Chevron’s stock dipped by 4.9% following the announcement, while Anadarko shot up 32.0%.

Boeing Co rose 2.6% as the plane maker’s stock recovered ground following its recent sell-off.

The CBOE Volatility Index – Wall Street’s so-called “fear gauge” slipped to a fresh six-month low on Friday, in a sign investors expect the good times to keep rolling.

Advancing issues outnumbered declining ones on the NYSE by a 1.86-to-1 ratio; on Nasdaq, a 1.31-to-1 ratio favored advancers.

The S&P 500 posted 60 new 52-week highs and 3 new lows; the Nasdaq Composite recorded 95 new highs and 38 new lows.

Volume on U.S. exchanges was 6.75 billion shares, compared to the 6.97 billion average over the last 20 trading days.

(Reporting by Stephen Culp; additional reporting by Saqib Ahmed; Editing by Susan Thoma)

Fed policymakers call for caution on further U.S. rate hikes

FILE PHOTO: A police officer keeps watch in front of the U.S. Federal Reserve building in Washington, DC, U.S. on October 12, 2016. REUTERS/Kevin Lamarque/File Photo

By Jonathan Spicer and Howard Schneider

RIVERWOODS, Ill./CHATTANOOGA, Tenn. (Reuters) – Another clutch of U.S. Federal Reserve policymakers said on Wednesday they would be cautious about raising interest rates without getting better a handle on how growing risks to an otherwise solid U.S. economic outlook could play out.

After months of tumult in the stock market, presidents of four of the 12 Fed regional banks said they wanted greater clarity on the state of the economy before extending the central bank’s rate hike campaign any further.

Three of the four, Charles Evans of Chicago, Eric Rosengren of Boston, and James Bullard of St. Louis, are voting members this year on the Federal Open Market Committee, the bank’s policy-setting panel.

Bullard has long been critical of the Fed’s rate increases, begun in December 2015, but the caution from Evans and Rosengren is new, even if they both believe growth will remain solid and rates will probably need to rise more.

The fourth president, Raphael Bostic of Atlanta, said there was no urgency to raise rates further at this juncture.

The remarks from the four come less than a week after Fed Chairman Jerome Powell eased market concerns that policy makers were ignoring signs of an economic slowdown. Powell said he was aware of the risks and would be patient and flexible in policy decisions this year.

Rosengren on Wednesday used those same two adjectives, while Evans said he would be “cautious.”

The new tone comes after the U.S. stock market dropped precipitously in the fourth quarter of 2018, suffering its worst December performance since the Great Depression. Other signs of tightening financial conditions surfaced as well, including a sharp slowdown in issuance of corporate bonds.

Short-term U.S. interest-rate futures are now pricing in less than a 2 percent chance of a rate hike this year, and traders see a one-in-four chance of a rate cut by next January.

That stands in stark contrast to forecasts from the Fed released after the central bank’s fourth 2018 rate hike in December. Those forecasts called for two more rate hikes this year.

Evans has been among the most vocal backers of gradually tightening U.S. monetary policy, and after a speech in Riverwoods, Illinois, on Wednesday told reporters he still believes the Fed will need to deliver three more rate hikes this year.

But, in his first public comments since November, he nodded to an array of “tough-to-read” factors highlighted by the recent market selloff, but penciled in a forecast for reasonably good U.S. growth and employment in 2019 and beyond.

Rosengren similarly said he expects solid growth this year and said he suspects financial markets are “unduly pessimistic.” But in a break from speeches last year, when he emphasized the risks of allowing unemployment to stay below sustainable levels for too long, Rosengren on Wednesday emphasized risks that could impinge on growth, and said he was taking on board the cautionary signals from falling stock markets.

“There should be no particular bias toward raising or lowering rates until the data more clearly indicate the path for domestic and international economic growth,” Rosengren told the Boston Economic Club. “I believe we can wait for greater clarity before adjusting policy.”

Bullard, meanwhile, told the Wall Street Journal that while the Fed had “a good level of the policy rate today,” there was no rush to push them higher.

Minutes from that meeting will be released later on Wednesday and could shed more light on how policy makers assessed the economy as they agreed to raise rates and, at that time, projected two more increases in 2019..

Overall, that marked the ninth increase of a quarter percentage point since December 2015, when the Fed began lifting interest rates from near zero, where they had been since the financial crisis in 2008.

Atlanta Fed President Raphael Bostic, who earlier this week said the Fed was likely to need at most a single rate increase this year, on Wednesday elaborated on that view as driven by conversations with business executives, who say they have become more defensive in preparing for slower growth by paying down debt and holding off on new plans.

Those conversations “are not consistent with the business sector ramping up,” Bostic said in remarks prepared for delivery to the Chattanooga Area Chamber of Commerce. Bostic, who backed all four rate hikes in 2018 as an FOMC voter, does not have a policy vote on the panel this year.

(Reporting by Howard Schneider in Chattanooga and Jonathan Spicer in Chicago; with reporting by Ann Saphir in San Francisco and Trevor Hunnicutt in New York; Writing by Dan Burns; Editing by Chizu Nomiyama)

Wall Street set to open higher as post-Christmas rally continues

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., December 27, 2018. REUTERS/Eduardo Munoz

By Medha Singh

(Reuters) – Wall Street was set to open slightly higher on Friday, extending a two-day rally amid volatile trading and raising hopes that the recent selloff may have eased for now.

The three main index futures rose more than 1 percent before paring some gains.

At 8:38 a.m. ET, Dow e-minis were up 0.43 percent. S&P 500 e-minis were up 0.38 percent and Nasdaq 100 e-minis were up 0.23 percent.

The final week of 2018 has seen wild swings in equities, with the CBOE Volatility Index, Wall Street’s main fear gauge, hitting its highest level since early February before easing slightly.

The benchmark S&P 500 tested its 20-month low early in the week and was at the brink of bear market territory before the three main indexes roared back with their biggest daily surge in nearly a decade on Wednesday and a late rally the following day.

On Thursday, the S&P fell as much as 2.8 percent but closed 0.8 percent higher as markets turned around late in the session.

In a sign of optimism on trade on Friday, China opened the door to imports of rice from the United States for the first time ever in the run-up to talks between the two countries in January.

“Yesterday’s reversal suggests the market has made a temporary bottom and we could probably rally well into the new year,” said Peter Cardillo, chief market economist at Spartan Capital Securities in New York.

“In spite of the government shutdown, the market seems more concerned on trade talks, which are somewhat lifting the negative sentiment.”

Stocks could swing between gains and losses due to the volatility but end-of-the-year window dressing and investors looking to buy stocks at attractive valuations should end in a positive session, Cardillo said.

Heavyweight technology names including Microsoft Corp, Apple Inc and Amazon.com  – which were among the biggest boosts to Wall Street’s rally on Thursday – rose more than 0.5 percent in premarket trading.

Of the 30 Dow components, 29 were trading higher.

The three indexes are set to end the week with gains of more than 3 percent each, snapping three straight weeks of steep losses.

Still, the indexes are down more than 9 percent for December and remain on track for their biggest annual percentage drop since 2008.

Investors head into 2019 with a list of worries ranging from U.S.-China trade tensions, rising interest rates and a cooling economy to a partial U.S. government shutdown, which is now in its sixth day.

(Reporting by Medha Singh in Bengaluru; Editing by Anil D’Silva)

Wall St. hits fresh year-lows on threat of government shutdown, slowing growth

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., December 21, 2018. REUTERS/Bryan R Smith

By Medha Singh

(Reuters) – Wall Street fell in volatile trading on Friday, after a few failed attempts at a rally, led by a drop in technology and other high-growth sectors, while defensive stocks rose amid concerns of slowing growth and a looming government shutdown.

The three major indexes swung between losses and gains of more than 1 percent as fragile investor nerves were tested by news of turmoil in Washington and soothing comments from an influential Federal Reserve official.

The S&P 500, already on pace for its worst December since the Great Depression, hit its lowest since August 2017. The Dow fell to its lowest since October 2017, while the Nasdaq sank to a 15-month low, toying with bear market territory for the second day in a row.

The defensive consumer staples, utilities and real estate sectors logged gains of 0.1 percent to 0.77 percent, while all the other eight S&P sectors declined.

“Investors are looking for cover. Within equities, investors are certainly gravitating towards the traditionally defensive segments of the market,” said Mike Loewengart, vice-president of investment strategy at E*TRADE Financial in New York.

The technology index sank 1.54 percent, while communication services, which houses high-growth names such as Facebook Inc and Alphabet Inc, dropped 2.2 percent.

President Donald Trump said there was a very good chance a government funding bill, which included funding for a wall along Mexico border, would not pass the Senate. Those worries were compounded by the sudden resignation of U.S. Defense Secretary Jim Mattis.

“I think it’s a confluence of all the known issues that the investors have been digesting for the last few weeks. We have the prospect of a government shutdown today. We have more shakeups within the Trump administration,” Loewengart said.

The markets got a lift earlier after New York Fed President John Williams said on CNBC the central bank is open to reassessing its views and listening to market signals that the economy could fall short of expectations.

Williams’ comments come after the Fed said on Wednesday it would largely stick to its plan to keep raising interest rates, spooking investors already grappling with mounting evidence of slowing growth and triggering the slide on Wall Street.

At 1:20 p.m. ET, the Dow Jones Industrial Average was down 169.07 points, or 0.74 percent, at 22,690.53, the S&P 500 was down 24.57 points, or 1.00 percent, at 2,442.85 and the Nasdaq Composite was down 127.58 points, or 1.95 percent, at 6,400.83.

Adding to the mix was “quadruple-witching,” when options on stocks and indexes as well as futures on indexes and stocks expire, tending to raise volumes.

Helping stanch the bleeding on Friday was Nike Inc, which jumped 6.2 percent after the company’s quarterly results beat Wall Street estimates on strength in North America. The stock was the biggest driver of gains on the Dow and S&P.

The three main Wall Street indexes are already in correction territory, having fallen more than 10 percent from their record closing highs. They are closing in on bear market territory, which is marked when an index closes more than 20 percent below its closing high.

Declining issues outnumbered advancers for a 2.52-to-1 ratio on the NYSE and a 3.32-to-1 ratio on the Nasdaq. The S&P index recorded no new 52-week highs and 102 new lows, while the Nasdaq recorded four new highs and 659 new lows.

(Reporting by Medha Singh in Bengaluru; Editing by Shounak Dasgupta)

Fed raises interest rates, signals more hikes ahead

A screen displays the headlines that the U.S. Federal Reserve raised interest rates as a trader works at a post on the floor of the New York Stock Exchange (NYSE) in New York, U.S., December 19, 2018. REUTERS/Brendan McDermid

By Ann Saphir and Howard Schneider

WASHINGTON (Reuters) – After weeks of market volatility and calls by President Donald Trump for the Federal Reserve to stop raising interest rates, the U.S. central bank instead did it again, and stuck by a plan to keep withdrawing support from an economy it views as strong.

U.S. stocks and bond yields fell hard. With the Fed signaling “some further gradual” rate hikes and no break from cutting its massive bond portfolio, traders fretted that policymakers could choke off economic growth.

“Maybe they have already committed their policy error,” said Fritz Folts, chief investment strategist at 3Edge Asset Management. “We would be in the camp that they have already raised rates too much.”

Interest rate futures show traders are currently betting the Fed won’t raise rates at all next year.

Wednesday’s rate increase, the fourth of the year, pushed the central bank’s key overnight lending rate to a range of 2.25 percent to 2.50 percent.

In a news conference after the release of the policy statement, Fed Chairman Jerome Powell said the central bank would continue trimming its balance sheet by $50 billion each month, and left open the possibility that continued strong data could force it to raise rates to the point where they start to brake the economy’s momentum.

Powell did bow to what he called recent “softening” in global growth, tighter financial conditions, and expectations the U.S. economy will slow next year, and said that with inflation expected to remain a touch below the Fed’s 2 percent target next year, policymakers can be “patient.”

Fresh economic forecasts showed officials at the median now see only two more rate hikes next year compared to the three projected in September.

But another message was clear in the statement issued after the Fed’s last policy meeting of the year as well as in Powell’s comments: The U.S. economy continues to perform well and no longer needs the Fed’s support either through lower-than-normal interest rates or by maintaining of a massive balance sheet.

“Policy does not need to be accommodative,” he said.

In its statement, the Fed said risks to the economy were “roughly balanced” but that it would “continue to monitor global economic and financial developments and assess their implications for the economic outlook.”

The Fed also made a widely expected technical adjustment, raising the rate it pays on banks’ excess reserves by just 20 basis points to give it better control over the policy rate and keep it within the targeted range.

Federal Reserve Board Chairman Jerome Powell arrives at his news conference after a Federal Open Market Committee meeting in Washington, U.S., December 19, 2018. REUTERS/Yuri Gripas

Federal Reserve Board Chairman Jerome Powell arrives at his news conference after a Federal Open Market Committee meeting in Washington, U.S., December 19, 2018. REUTERS/Yuri Gripas

CHOPPY WATERS

The decision to raise borrowing costs again is likely to anger Trump, who has repeatedly attacked the central bank’s tightening this year as damaging to the economy.

The Fed has been raising rates to reduce the boost that monetary policy gives to the economy, which is growing faster than what central bank policymakers view as a sustainable rate.

There are worries, however, that the economy could enter choppy waters next year as the fiscal boost from the Trump administration’s spending and $1.5 trillion tax cut package fades and the global economy slows.

“I think that markets were looking for more in terms of the pause,” said Jamie Cox, managing partner at Harris Financial Group in Richmond, Virginia.

“It’s not as dovish as expected, but I do believe the Fed will ultimately back off even further as we move into the new year.”

The benchmark S&P 500 index <.SPX> tumbled to a 15-month low, extending a streak of volatility that has dogged the market since late September. The index is down nearly 15 percent from its record high.

Benchmark 10-year Treasury yields fell as low as 2.75 percent, the lowest since April 4.

ECONOMIC PROJECTIONS

Fed policymakers’ median forecast puts the federal funds rate at 3.1 percent at the end of 2020 and 2021, according to the projections.

That would leave borrowing costs just above policymakers’ newly downgraded median view of a 2.8 percent neutral rate that neither brakes nor boosts a healthy economy, but still within the 2.5 percent to 3.5 percent range of Fed estimates for that rate.

Powell parried three questions about whether the Fed intended to restrict the economy with its rate policy, but gave little away.

“There would be circumstances in which it would be appropriate for us to go past neutral, and there would be circumstances in which it would be wholly inappropriate to do so.”

Gross domestic product is forecast to grow 2.3 percent next year and 2.0 percent in 2020, slightly weaker than the Fed previously anticipated. The unemployment rate, currently at a 49-year low of 3.7 percent, is expected to fall to 3.5 percent next year and rise slightly in 2020 and 2021.

Inflation, which hit the central bank’s 2 percent target this year, is expected to be 1.9 percent next year, a bit lower than the 2.0 percent forecast three months ago.

There were no dissents in the Fed’s policy decision.

(Reporting by Ann Saphir and Howard Schneider; Additional reporting by Lewis Krauskopf in New York; Editing by Paul Simao and Dan Burns)

Fed expected to increase rates, may signal fewer hikes ahead

FILE PHOTO: U.S. President Donald Trump looks on as Jerome Powell, his nominee to become chairman of the U.S. Federal Reserve, speaks at the White House in Washington, U.S., November 2, 2017. REUTERS/Carlos Barria/File Photo

By Ann Saphir and Howard Schneider

WASHINGTON (Reuters) – The U.S. Federal Reserve is expected to raise interest rates on Wednesday, but may cut the number of hikes it anticipates next year and signal an earlier end to its monetary tightening in the face of financial market volatility and rising recession fears.

The central bank is due to announce its decision at 2 p.m. EST (1900 GMT) after its final two-day policy meeting of the year. Fed Chairman Jerome Powell is scheduled to hold a press conference half an hour later.

Investors widely expect the Fed will lift borrowing costs by a quarter of a percentage point to a range of between 2.25 percent and 2.50 percent. It would be the fourth rate hike of the year and the ninth since the central bank began its current tightening cycle in December 2015.

A rate hike on Wednesday could draw the ire of the White House. President Donald Trump has repeatedly attacked the Fed for raising rates this year, saying it was undercutting his efforts to boost the economy. On Tuesday, Trump warned Fed policymakers not to “make yet another mistake.”

The Fed’s tightening is designed to reduce the monetary policy boost to a U.S. economy that is now growing much faster than central bank policymakers think it can sustain.

With the price of oil tumbling, economic growth in Europe and China slipping, and the fiscal stimulus from the Trump administration’s $1.5 trillion tax cut package expected to fade, Fed policymakers appear ready to back away from their prior view that the economy could weather three more rate hikes next year.

Fresh Fed economic forecasts to be released along with the policy statement may suggest that two rate hikes is more likely, economists say. Traders of interest rate futures do not even think the Fed will manage one hike.

“You are at an inflection point,” said Carl Tannenbaum, chief economist at Northern Trust. “You are most likely seeing growth slowing and you don’t know how much growth and what kind of growth is left over after the fiscal stimulus wears off. And that’s why they don’t know if they need zero, one, or more rate hikes.”

U.S. stocks were broadly higher Wednesday morning on investor optimism the Fed would signal it was near the end of its tightening cycle. The S&P 500 index & SPX has tumbled more than 12 percent since late September and, barring a turnaround, is on pace for its poorest December performance since 1931.

With borrowing costs after Wednesday’s expected rate hike close to, if not in, the broad range that Fed officials have identified as “neutral” for a healthy economy, policymakers are also likely to emphasize that future rate-setting decisions will hinge on new economic data.

That may be particularly important as data pulls the central bank in different directions, with a strong labor market and robust output suggesting the need for higher rates, and a weaker global economy and U.S. bond yields suggesting not.

The divergence between the U.S. economy and the rest of the world was cast into stark relief after FedEx Corp slashed its profit outlook on Tuesday. FedEx, seen as a bellwether for global trade, flagged a litany of issues including a Brexit-led slowdown in the United Kingdom, a contraction in the German economy and slowing China demand due to an ongoing trade spat with the United States.

FORWARD GUIDANCE

Economists say the Fed will probably modify or remove from its policy statement a reference to the likelihood that “further gradual increases” in its key overnight lending rate will be needed.

Doing so would mark one more step in the Fed’s march away from its reliance on forward guidance to shape market expectations in the wake of the 2007-2009 financial crisis and recession.

It could also help the central bank guard against criticism, whether from Trump or others, by allowing Powell to point to the economic realities on the ground as forcing his hand on any future rate hikes.

“They want to get to the place where they can say all decisions are data-dependent,” said Vincent Reinhart, chief economist at Standish Mellon Asset Management.

(Editing by Paul Simao)

Trump-Xi trade armistice clears way for more market gains

FILE PHOTO: U.S. President Donald Trump and China's President Xi Jinping shake hands after making joint statements at the Great Hall of the People in Beijing, China, November 9, 2017. REUTERS/Damir Sagolj/File Photo

By Jonathan Spicer and Lewis Krauskopf

NEW YORK (Reuters) – One of the darkest clouds hanging over Wall Street somewhat dissipated on the weekend when China and the United States agreed to shelve any new tariffs and reset discussions, at least temporarily halting an increase in their tensions over trade.

Investors said the agreement, lasting 90 days, between Chinese President Xi Jinping and U.S. President Donald Trump at the G20 summit, spelled a reprieve for stocks and could pave the way for a positive bookend to a volatile trading year.

U.S. stock index futures jumped as trading for the week began late on Sunday, with benchmark S&P 500 e-mini futures up 1.55 percent. Treasury futures were soft, suggesting an appetite for risk-taking could extend last week’s gains in the stock market.

The trade tension between Washington and Beijing, along with an uncertain outlook for U.S. rate hikes, have for months dogged prospects for equities. The U.S. pledge not to boost tariffs on $200 billion of Chinese goods could mark the most important deal in years between the world’s top two economies.

“It sets a pretty positive tone (and) stocks should have a decent rally into December,” said Nathan Thooft, Boston-based global head of asset allocation for Manulife Asset Management.

Thooft said he believed the Trump administration was using a threat to raise tariffs to 25 percent on Jan. 1, from 10 percent now as a negotiating tactic. “So when you start to see evidence that there is the ability to come to some type of agreement, that has to be viewed as a positive,” he said.

The stock market logged an official correction after a selloff in October and continued volatility in November that, just over a week ago, had left the benchmark S&P 500  stock index down 10 percent from its all-time high.

Markets rebounded last week on comments perceived as dovish from Federal Reserve Chair Jerome Powell, though the S&P was up only 2.4 percent in 2018.

The latest trade standoff began in September when the United States imposed the 10-percent tariffs, prompting China to respond with its own. Ahead of the leaders’ dinner in Argentina, investors had been bracing for a range of outcomes including a worse-case end to talks and more tit-for-tat measures that would have continued to crimp economic and corporate profit growth.

Instead, the Americans and Chinese officially lauded the result.

Beijing agreed to buy what the White House called a “very substantial” amount of agriculture, energy, industrial and other products. While the clock ticks on the 90-day tariff reprieve, the two sides will try to work out thorny issues including technology transfer, intellectual property and cyber theft.

“It’s not solved by any stretch of the imagination,” said Thooft. But risk assets and cyclical U.S. sectors like materials and industrials should benefit, he said on Sunday.

An initial jump late on Sunday of nearly 2 percent in Nasdaq 100 e-mini futures suggested that technology companies, many of which were hardest hit in the selloff, could rebound.

Gary Shapiro, CEO of the Consumer Technology Association, said he was encouraged by the trade talks and warned that raising tariffs to 25 percent as the White House had threatened “would likely hurt consumers, put several American companies out of business and displace thousands of American workers.”

POWELL TESTIMONY

Energy prices could also rebound on Monday since cooling trade tensions could boost the world economy and spur demand.

Oil prices had dropped from a four-year high of about $76 per barrel in early October to just above $50 on Friday. But U.S. crude oil was up 2.7 percent to $52.37 a barrel as of 6:07 p.m. EST (2307 GMT) on Sunday.

Aside from trade policy, Wall Street’s attention has also been trained on Fed policy.

Powell was scheduled to testify on Wednesday to a congressional Joint Economic Committee. But the hearing is expected to be postponed to Thursday because major exchanges will be closed on Wednesday in honor of former U.S. President George H.W. Bush, who died on Friday at the age of 94.

Last week, Powell backed the Fed’s gradual tightening but said its policy rate was “just below” a range of estimates of the so-called neutral level that neither stimulates nor cools growth. In response, stocks shot up and largely recovered November’s earlier losses.

In the wake of Powell’s speech, Nicholas Colas, co-founder of DataTrek Research, said: “what happens in Buenos Aires will determine if stocks post a positive 2018.”

The specter of a global trade war has hovered over the market since March when Trump announced tariffs on imported steel and aluminum. He also recently said the United States was studying auto tariffs, which could ripple through Europe and Japan, while a pact with Canada and Mexico left some investors heartened about potential progress with China.

Nancy Lazar, economist at research firm Cornerstone Macro, said in a note that the 90-day tariff delay and China’s “incremental concessions” are good news.

“But given the stern U.S. stance, we’re certainly not raising our outlook,” she said of a 2.8-percent growth estimate for the fourth quarter, still comfortably above potential.

With U.S. corporate leaders increasingly voicing concerns over rising costs associated with tariffs, Wall Street appeared set on Monday to welcome any development that eases those pressures.

(Reporting by Jonathan Spicer and Lewis Krauskopf; Editing by Grant McCool and Sandra Maler)

Firepower for U.S. stocks may lose spark as Democrats gain clout

FILE PHOTO: Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., October 11, 2018. REUTERS/Brendan McDermid/File Photo

By Lewis Krauskopf

NEW YORK (Reuters) – The U.S. stock market may be facing the remainder of Donald Trump’s presidential term with the prospect of less juice to supercharge it.

Stock returns have been fueled the past year by Trump’s corporate tax cuts, which have pumped up profits. Yet, any hope of further fiscal stimulus in the form of more tax cuts faded with the results of Tuesday’s congressional elections, with Democrats taking control of the House of Representatives from Trump’s Republican party.

“The return to political gridlock in Washington will likely serve to temper growth expectations, or at least moderate the prospect of additional stimulative fiscal policy,” said Jon Hill, US Rates Strategist at BMO Capital Markets in New York.

The election comes as the market is also losing the low-rate monetary policy that has supported equities during its near decade-long bull run, as the Federal Reserve is raising interest rates to stave off inflation.

Without both fiscal and monetary stimulus, Wall Street performance will depend even more on fundamental factors at a time investors are looking for signs pointing to when the long economic expansion will finally end.

“This is really not a stock market that needs more fiscal stimulus and I think in order for the bull market to continue what it really needs is strong earnings in the face of what is likely to be increasing interest rates,” said Rick Meckler, partner at Cherry Lane Investments, in New Vernon, New Jersey.

Indeed, some investors may see a silver lining in the diminished prospects for more tax cuts, given concerns about the ballooning deficit and even higher interest rates.

“If the Republicans swept today, you would get more fiscal stimulus but that also would likely result in higher interest rates and the Fed moving potentially faster,” said Keith Lerner, chief market strategist at SunTrust Advisory Services in Atlanta. “So beyond the initial positive reaction, my sense is that there would be some offsets from higher interest rates.”

At the same time, the potential for some fiscal stimulus is still alive through an infrastructure spending package, an area where analysts say Trump and Democrats could find common ground and where an agreement could boost stocks, particularly shares in construction and materials companies.

HEADWINDS AHEAD

Tuesday’s result of a split Congress, with Republicans keeping control of the Senate, was the most likely scenario projected by polling data and prediction markets ahead of the elections and had been anticipated by investors.

Immediate market moves to the news may be misleading. Two years ago, stocks futures plunged when it became clear that Trump would win the presidency, only for them to reverse course within hours.

Stock market gains this year may indeed continue – stocks historically have climbed following midterm elections. For the two calendar years following each national U.S. election, the S&P 500 had a mean annual increase of 12 percent under Republican-controlled governments, compared to an increase of 9 percent for Democratic-controlled governments and a 7 percent rise for gridlocked governments.

Yet replicating the lofty returns of Trump’s first half of his term – the stock market is up 29 percent since his election – may prove elusive.

Democratic control of the House makes the prospect of a new tax-cut package, following the recent steep cut in the U.S. corporate tax rate, appear less likely. Trump has been seeking a 10 percent middle-class tax cut while making permanent individual tax cuts from his 2017 tax overhaul.

The change in House control could bring other challenges for the market.

Trump’s favoring of light regulations for banks and other industries has created a climate that investors say has helped stocks. A Democratic-led House could bring greater oversight on industries such as pharmaceuticals and banks.

With fresh oversight power, Democrats could inspect nearly every aspect of Trump’s presidency from his long-elusive tax returns to possible business ties with Russia and conflicts of interest. In the event the House attempts to impeach Trump, history suggests market volatility could spike, at least in the short term, according to OppenheimerFunds.

But, on the positive side for stocks, analysts doubt Democrats would be able to roll back the heart of the market-friendly changes, including the corporate tax cuts.

The Democrats’ victory in the House could also benefit the market, some investors have said, by tempering Trump’s aims such as on international trade.

Any pressure on stocks could be less severe because the stock market already endured a steep pullback in October from record highs, which some investors in part attribute to jitters over uncertainty about the election.

And some investors will be happy just to move on from the elections.

“It’s one less thing that’s in front of you that you have to worry about,” said Walter Todd, chief investment officer at Greenwood Capital in Greenwood, South Carolina.

(Additional reporting by Jennifer Ablan, Saqib Iqbal Ahmed and Trevor Hunnicutt in New York; Editing by Megan Davies and Frances Kerry)

Two years in, Trump holds stock market bragging rights

U.S. President Donald Trump speaks at a campaign rally on the eve of the U.S. mid-term elections at the Show Me Center in Cape Girardeau, Missouri, U.S., November 5, 2018. REUTERS/Carlos Barria  

By Noel Randewich

SAN FRANCISCO (Reuters) – U.S. President Donald Trump has taken credit for the stock market’s gains during his nearly two years in the White House, and those claims are reasonable given the impact of tax cuts and pro-business policies on investor sentiment.

The S&P 500 has risen 28 percent since Trump’s election in November 2016 to the eve of congressional midterm elections on Tuesday. This surpasses the market’s performance over the same time frame under any other president in the past 64 years. Under President Dwight Eisenhower, the S&P 500 rose 29 percent from his election in November 1952 through November 1954.

Sweeping corporate tax cuts, an initiative driven by Trump, supercharged U.S. companies’ earnings and helped lift the cash-rich technology sector. The Republican party last year passed the biggest overhaul of the U.S. tax code in over 30 years, boosting U.S. corporate earnings.

Still, other sectors that could have been expected to benefit strongly from a Trump presidency have lagged. Indeed, the individual stocks that have gained and lost the most during his reign have little discernable link to Trump’s presidency.

How the market shakes out in the final two years of Trump’s presidency will probably be influenced by Tuesday’s elections. Analysts expect pressure on stocks if Democrats gain control of the House of Representatives and a sharper downward reaction if they sweep the House and Senate.

On the contrary, if Republicans hold their ground, stocks could gain further, with hopes of more tax reform ahead.

Trump’s strong stock market record has been maintained even after a recent pullback on Wall Street as worries about trade battles, inflation, and rising interest rates have increased caution among investors. Starting in 2010 under President Barack Obama as the world recovered from the financial crisis, the S&P 500 has enjoyed its longest bull market in history.

With more than half of Trump’s presidency still to come, how the market will perform over his whole term is unknown. Democratic President Bill Clinton saw the S&P 500 triple during his two terms in the White House.

Average S&P 500 company earnings per share are on track to rise 24 percent this year, the strongest annual gain in eight years, according to IBES data from Refinitiv.

Investor confidence stemming from the tax cuts and Trump’s other business-friendly policies so far have more than made up for ongoing worries on Wall Street that his trade conflict with China is hurting the U.S. economy, and that it could become worse.

The tax cuts also led Apple and other multinationals in the technology sector to repatriate billions of dollars in profits held overseas, some of which went toward buying back stock and sending Wall Street higher.

The S&P 500 information technology index has gained 51 percent since Trump’s election. Financials, which benefited from Trump’s deregulation of the banking industry, have climbed 34 percent since Nov 8, 2016.

Still, some companies that had been expected to boom under Trump have fared poorly. The S&P 500 energy index is flat since Trump’s election, even though crude prices rose over 50 percent during that time and despite Trump putting the brakes on Obama-era policies aimed at reducing the country’s reliance on oil.

Semiconductors have fared better than any other industry group, even though they are highly exposed to China and could become casualties in Trump’s trade war with Beijing.

Along with telecommunications, food and tobacco companies, automakers on average have fared worst among 27 industry group’s since Trump’s election. General Motors Co and Ford Motor Co have been wrestling for years with tepid global demand, with recent signs of a deep slowdown in China.

Industry groups are more detailed categories than the 11 sectors widely tracked on the stock market.

Interest rates, economic growth, company earnings and inflation are widely viewed as strong influences on stock prices, making who holds power in Washington just one of many factors affecting investor sentiment.

Abiomed Inc, the S&P 500’s top performer since Trump’s election, has jumped over 260 percent, helped in part by the success of its Impella heart pumps.

General Electric’s 68 percent loss makes it the S&P 500’s worst performer since Trump was elected. The former industrial powerhouse has foundered in several key markets in recent years and is aggressively cutting costs and selling businesses.

(Reporting by Noel Randewich; Editing by Megan Davies and Cynthia Osterman)