The fears of a prolonged trade war could trigger a global recession

Commenting on today’s trading focusing on a global recession, Gorilla Trades strategist Ken Berman said:

global recession

mohamed_hassan / Pixabay

Today’s broad sell-off in stocks and the dip in Treasury yields were fueled by the fears of a prolonged trade war that could trigger a global recession. Safe-haven assets are back in focus once again, and Treasuries, gold, and the dollar could remain strong, especially if today’s developments lead to a negative outcome at this week’s talks.

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Q3 2019 hedge fund letters, conferences and more

The major indices closed lower for the second day in a row, as today’s diplomatic skirmish between the U.S. and China together with the troubling Brexit-related developments put pressure on risk assets globally. The Dow was down 314, or 1.2%, to 26,164, the Nasdaq lost 133, or 1.7%, to 7,824, while the S&P 500 fell by 46, or 1.6%, to 2,893. Decliners outnumbered advancing issues by an almost 4-to-1 ratio on the NYSE, where volume slightly below average.

The key sectors all finished the day in the red, and while the defensive utilities outperformed yet again, tech stocks, services, financials, and industrials all struggled due to the global risk-off shift. Stocks already opened significantly lower this morning, as British assets suffered a major hit, due to the likely failure of the ongoing Brexit talks between the U.K. and the European Union. The Great British Pound hit a new one-month low against the dollar, and the risk of a no-deal Brexit seem to be rising again. 

Global recession fears back on

The expansion of the U.S. trade blacklist caught most participants by surprise today, and the fact that the U.S. side focused on the Asian country’s Muslim Xinjiang province could spell trouble ahead of the highly-anticipated negotiations. China was quick to react to the diplomatic sanctions and the Ministry of Commerce ‘strongly urged’ the U.S. to reverse the decision, and to keep the distance o the sensitive issue. The expanded blacklist contains several crucial tech firms, meaning that the issues concerning Intellectual Property (IP) will remain paramount in the coming months.

We could be in for another tumultuous session tomorrow, and while trade-related headlines will likely have the biggest impact again, the Fed could provide a few surprises. The minutes of the Central Bank’s latest meeting will be out in the afternoon, and in light of the recent drop in Treasury yields, all words will be under scrutiny. The JOLTS job openings estimate and the weekly crude oil inventory data will also come out tomorrow morning, but volatility could remain muted on Wall Street ahead of the key afternoon release.

Global recession worries to lead to fed easing?

Fed Chair Jerome Powell held a speech this afternoon, and he stated that the Central Bank will soon start to expand its balance sheet again, due to the recent interbank funding crisis. Mr. Powell emphasized that this new expansion is by no means another quantitative easing program, and that despite the global risks the outlook for the domestic economy remains solid. Tomorrow’s meeting minutes have the potential to rock financial markets, as the FOMC was clearly split regarding the recent rate cut by the Bank.

Technicals

Technical Corner:  Despite the recent bounce, the short-term trend remains negative for the major indices, and today’s sell-off cements the mixed technical outlook for stocks. The benchmarks all remain above their rising 200-day moving averages of 7,733 for the Nasdaq, 2,845 for the S&P 500, and 25,900 for the Dow, but the indices are once again back below their 50-day moving averages of 2,938 for the S&P 500, 7,991 for the Nasdaq, and 26,468 for the Dow.

Small-caps continue to be under pressure because of the fears of a global recession, the declining Treasury yields, and the ‘flight-to-safety’ trade that favors the major safe-haven assets. The Russell 2000 remains below both its 50- and 200-day moving averages, and today, the index completed the ‘death-cross’ technical pattern, meaning that its short-term indicator crossed below its long-term one. While this pattern alone wouldn’t mean too much in a bull market, the benchmark is hovering just above its lows from May and August, so small-caps could experience heavy trading in the coming days. Stay tuned!



About the Author

Jacob Wolinsky
Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Prior to ValueWalk, Jacob was VP of Business Development at SumZero. Prior to SumZero, Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver