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Market Brief – Monday 5/13/19

The trade war is on as the Trump Administration has implemented a 25% tariff on $200 billion of Chinese goods. China has responded with a 25% tariff on the import of $60 billion of U.S. goods. The Trump Administration is preparing for the next set of tariffs, which should come later this week.

Supporting the global slowdown, South Korean chip exports fell a whopping -31.8% on an annualized basis for the first ten days in May. South Korean exports as a whole fell -6.4% from where they were a year ago.

Car sales in China fell -16.6% in April, which is the eleventh straight month of declining car sales. China’s car sales remain in contraction.

China has threatened to stop buying U.S. agricultural commodities, even though they haven’t been buying very many lately. A case of the African Swine Flu was reported in Hong Kong over the weekend, and if true, could lead to the slaughter of hogs in Hong Kong. China is in a predicament, as they don’t have enough food to feed their people, and the rest of the world can’t meet their demand.

China has also mentioned they may start dumping their U.S. Treasury bond holdings, but it is unlikely they can achieve such a threat. They have also threatened to drop orders from Boeing and restrict service trade with the U.S. The trade spat is likely to get worse before it gets better.

Not surprisingly, the broad equity indices were all down more than two percent today as investors start to realize that a trade deal is not going to be made any time soon. The S&P 500 closed inside a long-trending resistance level, while the DJIA closed below its 200-day moving average, which is a bearish sign for the Dow. Treasury yields were also down today despite claims that China may start dumping their Treasury bonds.

Ten-year Treasury yields remain inverted against the Federal Funds rate, which means 10-year yields are lower than the Fed’s overnight bank lending rate. Adding to the problem in the bond market, three-month Treasury yields are higher than 10-year Treasury yields, which is generally considered a signal for an impending recession.

Investors bid physical gold higher, but it ran into stiff overhead resistance at $1,300/oz. When rallies continue to fail at resistance, prices eventually head lower. Mining stocks rallied as well, but since mining stocks tend to follow Emerging Markets, which were down hard today, don’t expect the miners to follow through with today’s rally.

Oil and gas producers were also hit hard even though China didn’t levy any tariffs on crude oil imports. The large oil and gas producer ETF closed just on the bottom end of its support channel, which if broken, will send stock prices back to their December lows.

After being beaten down repeatedly, agricultural commodities found buyers. Keep in mind, the “Smart Money” likely knew ahead of time that President Trump was planning to buy agriculture commodities to bail out our farmers, so they likely let prices slide to get a lower entry point. When the Trump Administration unveils their plan to bail out the farmers, which is rumored to be around $15 billion, this sector will rally.