TRADE POLICY IMPACTS FINANCIAL MARKETS AND GLOBAL ECONOMY
May 19, 2019
China Market — Fishers, IN — Norwood Economics

THE ONGOING TRADE WAR BETWEEN THE U.S., CHINA, AND EUROPE WILL CAUSE WORLD TRADE TO CONTINUE TO SLOW.

FROM THE BLEACHERS, VOL. 20

MARKET UPDATE

The S&P 500 fell 0.8% on the week, finishing at 2859.53. The index fell 2.5% on Monday, as traders did indeed test the downside, and is now down 3% on the month. The China trade talks continue to be the one thing the market is supposedly focused on now, according to most of the talking heads on TV and radio. Regardless, the index bounced off 2800 before recovering lost ground most of the rest of the week. It did manage to finish back above the 50-day moving average on Thursday, but couldn’t hold on gapping down Friday below the 50-day, rallying above during the day only to sell-off again and close below the 50-day for the week (creating an inverted cross in the process). Expect the market to test the downside on Monday barring any major positive fundamental news over the weekend.


There wasn’t much U.S. economic data out last week, but one notable reading was a 15-year high in Consumer Confidence, which registered 102.4 in May, up from 97.2 in April. Also, a survey of U.S. economic conditions rose for the 3rd straight month in April, an increase of 0.2% over March. The Conference Board survey points to economic growth slowing to 2.0% by the end of 2019. The current expansion will enter its 11th year in July, making it the longest economic expansion in U.S. history.


As for the China Trade War – the foreign exchange (forex) market is reacting with the yuan testing the 7.0 level (7.0 Yuan per dollar). It finished Friday at 6.95. According to forex experts, China has defended the 7.0 level for years turning it into a psychologically important level and one to watch in the ongoing trade war. There is increasing speculation that the Chinese may allow their currency to drop against the dollar to offset at least some of the impact of the tariffs currently being imposed on them by the U.S. A depreciation of the yuan would make Chinese exports to the U.S. cheaper.


There is a consensus among economic experts that the ongoing trade war between the U.S., China, and Europe will cause world trade to continue to slow. In fact, “world trade shrank by 0.3 percent in the fourth quarter of 2018 and is likely to grow by 2.6 percent this year, below a previous forecast of 3.7 percent,” the World Trade Organization said in early April, according to Reuters. Another point to keep in mind is that Europe’s current production surplus is far larger than the Chinese production surplus. Measured in dollars, Italy’s excess production in 2018 was larger than China’s, according to Barron’s. Excess output from the 19 members of the euro area is now worth about 0.6% of world production, while Chinese excess output is currently just 0.1%. Of course, excess output, output that isn’t being consumed at home, results in increased exports to U.S. shores since we are historically the world’s consumer of last resort. Given Trump’s obsession with trade deficits, it’s unlikely that he will drop confrontational trade policy off his agenda anytime soon.


All of which means that there is plenty of opportunity for the major trading blocks to further damage the world economy with ongoing tariff wars that will eventually feed into the financial markets in a more lasting manner.

INVESTING – INTEREST RATES, CAPITAL FLOWS, EXCHANGE RATES AND THE STOCK MARKET

We live in a world economy whether we like it or not; goods, services, and capital flow around the world seeking the best prices and highest returns on investment. Falling U.S. interest rates cause capital to flow overseas in search of a higher return, which in turn causes the dollar to fall in value relative to other currencies as the supply of dollars on the international stage increases. The reverse is true when U.S. interest rates rise; capital flows out of foreign markets back into the U.S. causing interest rates overseas to rise, economies to slow, and stock markets to fall. 


It is the adjustment in real exchange rates that prevents trade policy from actually impacting the trade balance. Placing a tariff on Chinese goods reduces the amount of Chinese imports, which increases our net exports temporarily. However, the increase in net exports creates increased demand for dollars, which causes the dollar to appreciate against other currencies. As the dollar appreciates, imports into the U.S. become cheaper while our exports grow more expensive. A tariff on Chinese steel might limit the amount of steel coming into the U.S. from China, but it also makes U.S. exports more expensive and imports less expensive due to dollar appreciation. The upshot is that net exports don’t increase over the long run as a result of the change in exchange rates and the trade deficit remains. Thus, trade policy can create winners and losers among U.S. companies, but can’t reduce our trade deficit over the long-term – for that we’d need to increase savings.


However, trade policy can certainly impact our financial markets as well as the real economy. For example, the Chinese may decide to defend the 7.0 Yuan/dollar exchange rate to avoid capital fleeing Chinese shores for better returns elsewhere and to placate the U.S. as trade talks continue. The Chinese would have to sell some of their dollar reserves in order to buy the Yuan. Sales of dollar assets could include Treasuries, Corporate Bonds, and stocks, putting upward pressure on U.S. interest rates and downward pressure on the U.S. stock market. How big of an impact might Chinese selling have on the respective markets? We may find out in the coming months, depending on whether China decides to defend the 7.0 level or not.


Regards,


Christopher R Norwood, CFA


Chief Market Strategist

By Christopher Norwood July 7, 2025
Executive Summary The S&P 500 rose 1.7% in a holiday-shortened week, finishing at 6,284.65 Volatility continues to fall from its elevated levels in early April The S&P is up 6.76% year-to-date. Industrials are leading the way, up 13.40% Price determines returns when buying an asset  Diversify away from a concentrated U.S. large-cap stock portfolio Job growth has been holding steady for almost a year now Analysts have been raising earnings estimates recently 90-day tariff suspension ends on Wednesday The Stock Market The S&P 500 rose 1.7% in a holiday-shortened week. The Nasdaq rose 1.6%. Both indexes set new record highs with the S&P reaching 6,284.65 on Thursday afternoon. The jobs report out Thursday spurred the S&P higher. The index gapped up at the open, closing Thursday up 0.83% (see chart below). The S&P 500 is up 26% from the selloff low on April 8, while the Nasdaq has surged 34.9%.
By Christopher Norwood June 30, 2025
Executive Summary The S&P 500 rose 3.4% last week, climbing to 6,173.07 The Magnificent 7 are outperforming the S&P 493 by over 18% since April The Cboe Volatility Index (VIX) fell as low as 16.11 last week Investors seem unconcerned about tariffs and war Treasury interest rates are starting to fall The Fed has little reason to cut if unemployment isn't moving higher The stock market is at record highs Corporate bond spreads are tight, meaning credit is abundant The dollar has fallen by around 10% in 2025 Inflation is expected to move higher because of tariff The Stock Market The S&P 500 rose 3.4% last week. The Israeli-Iranian ceasefire was credited with the surge to the upside. The index had lost 0.7% over the prior two weeks.
By Christopher Norwood June 23, 2025
Executive Summary The S&P 500 gained 0.3% last week, climbing to 5,967.84 The index is having trouble staying above 6,000 Technical indicators are turning somewhat negative The Federal Reserve kept the overnight rate at 4.25% - 4.50% The updated “dot plot” shows a divided Fed Seven members indicate no rate cuts in 2025 Eight members forecast two rate cuts in 2025 The Fed is forecasting a slower economy in 2025 and 2026 The hard data is starting to point to a slowing economy Inflation is still well above the Fed’s 2% target
By Christopher Norwood June 16, 2025
Executive Summary The S&P 500 fell 0.4% last week to finish at 5,976.97 Friday's sell-off due to Israel's attack on Iran The Volatility Index (VIX) is rising due to the war in the Middle East Higher volatility is usually associated with a down move in the market There is no chance of a Fed Funds Rate cut at this week’s meeting according to the CME FedWatch Tool The unemployment rate has been rising slowly The dollar continues to weaken The U.S. needs to reduce its spending to avoid a currency crisis  The Stock Market
By Christopher Norwood June 9, 2025
Executive Summary The S&P 500 rose 1.5% last week to finish at 6,000.36 The May payroll number came in above estimates The U.S. economy is slowing, despite the S&P 500 poking above 6,000 The Labor Force Participation Rate fell to 62.4% from 62.6% Inflation may have bottomed and is set to rise The services price paid index is pointing towards a higher CPI The declining dollar is a concern Tariffs are a tax The Q2 nowcast seems to be indicating that negative economic impacts from tariffs won’t affect Q2 International markets have far outperformed U.S. markets so far in 2025 The Stock Market The S&P 500 climbed 1.5% last week and closed at 6,000.36. The Dow rose 1.3% while the Nasdaq rose 2.0%. Interest rates rose as bond prices fell. A stronger-than-expected jobs report on Friday is getting the blame for rising yields. The jobs report was also responsible for the S&P’s gap-up open on Friday (chart below).
By Christopher Norwood June 2, 2025
Executive Summary The S&P 500 rose 1.9% last week to finish at 5911.69 The S&P 500 rose 6%, the Dow rose 3.8% and the Nasdaq climbed nearly10% in May Could see another test of support around 5,800 this week Several longer-term negative divergences may be pointing to a tough summer Declining new highs during an advancing market is a negative Earnings estimates for 2025 and 2026 have been trending lower Earnings drive the stock market over the long run
By Christopher Norwood June 2, 2025
Executive Summary The S&P 500 fell 2.6% last week to close at 5,802.82. The 20-Year Treasury auction went poorly. The yield rose above 5%. The 5% threshold has twice this year resulted in the administration adjusting its stance on tariffs. (Make that three times as Trump over the weekend gives the U.K. until July 9 th .) Longer-term inflation expectations are rising. Moody’s downgraded the U.S. to Aa1 on 16 May. The credit default swaps market sees the U.S. as a Baa1/BBB+ credit, on par with Greece. The tax cut bill will add to the deficits and debt. Long-term interest rates might well continue to rise.
By Christopher Norwood May 19, 2025
Executive Summary The S&P 500 rose 5.3% last week to finish at 5,958.38 The Dow advanced 3.4% and the Nasdaq added 7.2% A falling VIX means investor confidence is increasing A 90-day pause in the trade war sent the S&P higher Earnings estimates are falling along with GDP growth forecasts Earnings and interest rates drive the stock market over the long run Investors are chasing performance Small business hiring plans and job openings haven’t improved Norwood Economics continues to look for good companies on sale The Stock Market
By Christopher Norwood May 19, 2025
Executive Summary The S&P 500 fell 0.5%, to finish at 5,659.91 The Dow fell 0.3%, and the Nasdaq dropped 0.5% The 200-day moving average is the next resistance U.S. nominal GDP growth expected to slow significantly Bank of America shifts investment focus Norwood Economics already has exposure to gold for most clients Norwood Economics is overweight international stocks The risk of both higher unemployment and higher inflation has increased The Federal Reserve declined to lower the fed funds rate last week The Stock Market
By Christopher Norwood May 5, 2025
Executive Summary The S&P 500 rose 2.9% last week to finish at 5,686.67 The Dow was up 3% last week, and the Nasdaq rose 3.4% The counter-trend rally is ongoing Investors are extremely bearish due to worries about the trade war Political prediction markets are back Exploding imports are not a sign of weakening demand The April jobs report was better than expected The Trade War continues Capital is flowing into international and emerging markets The US dollar will likely continue to weaken The Stock Market
More Posts