S&P 500 futures slide; traders assess trade war impact on corporate profits

Bloomberg New York | Updated on August 26, 2019

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Volatility has surged in August, with more than half its sessions seeing swings of 1 per cent or more

Equity futures tumbled as trading resumed on Monday, with investors struggling with the increasingly complex task of assessing the impact of a trade war on the economy and corporate profits.

September contracts on the S&P 500 trimmed losses to fall 0.7 per cent as of 12:55 pm in Singapore after declining as much as 1.6 per cent earlier, while futures on the Nasdaq 100 were down by a similar amount. The swings followed a sell-off on Friday that sent benchmark gauges to their third 2 per cent-plus plunge of August, now likely to be the second down month for equities of 2019.

Shares are being swayed by events from before and during the weekend. Stocks plunged Friday after Trump warned of an unspecified response to China’s plan to slap new tariffs on $75 billion of United States (US) goods. After markets closed, he said he would hike existing tariffs, applied to about $250 billion in Chinese goods, to 30 per cent from 25 per cent as of October 1. He also said a new round on $300 billion in goods will be taxed at 15 per cent, up from 10 per cent.

The US-China back-and-forth blotted out comments by Federal Reserve Chairman Jerome Powell, who said the US economy is in a favourable place but faces significant risks, reinforcing bets for another interest-rate cut.

Chinese Vice Premier Liu He, the country’s top trade negotiator, said he firmly opposes an escalation of a trade war and it is not conducive to China, the US and the interests of people all over the world, Caixin reported on Monday.

Moves in futures follow four straight down weeks that pushed the S&P 500 almost 6 per cent below its record high set on July 26. Volatility has surged in August, with more than half its sessions seeing swings of 1 per cent or more, though US shares still more than 20 per cent above levels at the end of December.

“There are a lot of investors or players who are away, and its easy to get this type of volatility because of that fact. But it is very disappointing to see the sell-off so dramatic at the start,” Walter Bucky Hellwig, a senior vice president at BB&T Wealth Management in Birmingham, Alabama, said.

Anxiety piles up

The S&P 500, which closed on Friday at 2,847.11, has twice bounced back from violent drops in August. When the index fell to 2,844 in the months first few days, bulls sent the gauge 3.3 per cent higher over the next three days. A virtually identical rally occurred again a week later when stocks fell to 2,840.

Swings like those have frustrated anyone trying to chart a coherent course in the market. Yields on government bonds are sending grim signals about the economic future, with the 10-year Treasury yield hovering near 1.5 per cent, while estimates for corporate profits have sagged. On Sunday, two top aides said Trump has the authority to force American companies to leave China, as he threatened on Twitter, yet whether he invokes those powers is another question.

“For these events to unfold on the eve of one of the slowest trading weeks of the year creates market crash potential. Crowded complacent longs combined with illiquid trading, expensive valuations, narrow leadership, slowing earnings and an unparalleled peacetime policy uncertainty place markets in a dangerous position,” said Michael O’Rourke, Jones-Trading’s chief market strategist.

The sell-off has pushed the S&P 500 below a level that matches its high-water mark from January 2018, meaning people who bought back then, during the biggest rally of Trump’s presidency, remain stuck. Of greater interest to chart analysts, the index now sits only 7 points above lows set during earlier August plunges.

Dip buyers stepped in when the S&P neared 2,840 twice before, fuelled by optimism the economy is strong and the trade war resolvable. Whether they will be as confident after Trump tweeted that the US would be better off without China is an open question -- and they were not on Sunday.

“Given the global slowdown has already taken hold and bordering on potential of a recession, this additional uncertainty is unwelcome to say the least. The reaction doesn’t surprise me. Investors are reacting to a legit escalation. With that said, there are offsets. Clearly this is even clearer evidence for the need for more monetary and fiscal accommodation,” said Nathan Thooft, Manulife Asset Managements head of global asset allocation.

Chart analysts are watching 2,820, twice an intra-day low for the S&P 500 this month. If that is breached, 2,800 becomes the line to watch, according to Frank Cappelleri, senior equity trader and market technician at Instinet LLC. Its roughly the 200-day moving average thats supported the gauge all year and also a spot where stocks peaked three times late last year.

Published on August 26, 2019

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