Written by Samer Hasn, Senior Market Analyst at XS.com
S&P 500 futures are down nearly 1% in early morning trading today after returning from the extended holiday.
US stocks are poised for a negative start to the week amid growing pessimism about the possibility of reaching a deal between the United States and China to resolve the trade conflict. Although the holiday did not witness any significant escalation, the prospects for de-escalation are unclear.
According to the Wall Street Journal, China has refused to communicate at the level of the two countries’ presidents or foreign ministers. Talks in the capitals of both countries have not progressed on negotiations via a third party, and neither side appears in a hurry to negotiate.
The current stalemate between the two trading partners will keep markets in a state of uncertainty, keeping risk appetite high and preventing bullish bets on stocks despite relatively low prices. The failure to negotiate leaves the door open to further escalatory steps from both sides, raising concerns about the possibility of a broader stock market collapse.
Failure to reach a deal soon could entangle more countries around the world in this trade conflict, potentially escalating into a global trade war. China, through its Minister of Commerce, warned countries against making deals with US that would harm China’s interests and threatened retaliatory measures.
The decline in futures contracts also coincides with a renewed wave of selling in long-term US Treasury bonds (over 10 years) amid the diminishing status of these debt instruments as a zero-risk safe haven. These concerns about the creditworthiness of the US were exacerbated by Donald Trump’s renewed talk of his intention to fire Federal Reserve Chairman Jerome Powell.
Such a move would undermine confidence in the independence of the Federal Reserve and threaten a broader sell-off in the money market. Despite Trump’s repeated statements about firing Powell, I do not believe he will actually proceed with an early dismissal. According to the New York Times, Trump has received warnings from his team about the consequences of this move, which could cause a widespread decline in the financial markets. While Trump has become increasingly concerned about a recession on the scale of the Great Depression of 1929 during his presidency, and he and his advisors are convinced that they are close to financial meltdown.
Trump’s team may be more cautious to prevent the president from rushing into decisions that could further unsettle the bond market. It is believed that the sell-off following Independence Day influenced the decision to suspend tariffs for 90 days on all countries except China.
Now, until Trump’s winding trade policy is straightened out and the US and China begin to build communication bridges, the stock market may remain vulnerable to continued sell-offs, and any gains it achieves may be fragile.
