For a solid year, financial markets loved the Trump Trade. They're not so enamored of Tariff Thursday.
For the second time this month, U.S. equities sold off and investors sought havens after the Trump administration announced plans to impose sweeping levies that threaten to rewrite the rules of global trade. While the threat of rising interest rates and some company-specific angst added to market anxiety, selling was heaviest in sectors most likely hurt by the simmering trade war.
Here's a rundown:
Aircraft and Industrials
Boeing Co. fell more than 5 per cent while the broader S&P 500 Industrials sector gave back over 3 per cent in the steepest retreats in six weeks. China has specifically threatened the US. aircraft maker if Trump raised levies. In 2016, the Communist Party newspaper said its Boeing orders, among them a $38-billion package announced when China's president visited, could be replaced with Europe's Airbus.
Caterpillar Inc. sank the most since the Brexit vote and 3M Co. tumbled 4.7 per cent as companies that derive sales from abroad got battered.
Banks and insurers bore the brunt of Thursday's sell-off. A slump in Treasury yields as investors sought havens weighed on the sector's earnings prospects. JPMorgan Chase & Co. lost 4.2 percent.
According to Claude Barfield, a resident scholar at the American Enterprise Institute, China's method of retaliation could mirror the European Union response: restrictions on consumer companies based in the home states of key Congressional leaders.
That includes Wisconsin's Harley Davidson and California's Levi Strauss & Co. The apparel maker, along with 24 other retail companies, recently sent a letter to the president expressing concern "about the negative impact" over "remedial actions" in the trade act, warning that prices for clothing, shoes and electronics could rise.
Harley lost 2.6 per cent and the Consumer Staples Select Sector SPDR Fund, ticker XLP, extended its losing streak to nine sessions. The fund has seen two days of outflows.
U.S.-listed shares of Chinese companies are getting slammed Thursday. The Guggenheim China Technology exchange-traded fund closed down more than 5 percent, its worst daily loss since 2015. The American depositary receipts for Baidu Inc. and Alibaba Group Holding Ltd. were under substantial pressure throughout the session, with the former posting its largest loss of the year.
China's Global Times -- which has links to the ruling Communist Party -- on Tuesday accused the U.S. of "dumping" soybeans, raising concern that the crop will be among the first items China targets. A smaller than anticipated Argentinian soybean yield in the face of a relentless drought, however, may nonetheless force China to keep buying American. Front-month soybean futures were little changed on Thursday.
"Punitive tariffs on certain Chinese products" from Washington could dent U.S. soybean shipments, Commerzbank analysts including Carsten Fritsch wrote in a note to clients. "China has already announced retaliatory measures, which could also affect the agricultural sector."
China may also take aim at industries and states that employ President Trump's supporters -- including the nation's agricultural heartland. U.S. companies make up more than half of the $880 million VanEck Vectors Agribusiness ETF, ticker MOO. Monsanto Co., Zoetis Inc., Deere & Co. and Archer-Daniels-Midland Co. make up four of the fund's top five allocations. It ended the session down 2.5 per cent.
Means of Foreign Exchange
Currency depreciation could be one channel through which authorities in Beijing aim to increase the competitiveness of their products. The dollar rose 0.5 percent relative to the Chinese offshore yuan Thursday, remaining well within its year-to-date range. Six-month implied volatility for the pair ticked higher but is well off its 2018 high.
Treasuries in China
U.S. sovereign debt will also be in focus. China's holdings of American bonds, notes and bills have already dipped to a six-month low as of January. In early January, U.S. debt sold off following a Bloomberg report that senior Chinese government officials had recommended slowing or stopping purchases of Treasuries -- but such fears proved overblown, with the 10-year yield ultimately ending the day relatively unchanged. The price action in bonds today reflected a flight to safety, with 10-year Treasury yields posting their second-largest decline of 2018.
Still, it remains to be seen just how thorough Trump's tariffs will be and if China will indeed retaliate, pushing us to the brink of a potential trade war.
"If trade concerns go away or are alleviated, that's good for stocks because we weathered this trade concern," Tom Essaye, founder of "The Sevens Report," said by phone. "If we don't have to worry about trade, we can focus on economic data, the Fed and inflation, and the market has a good handle on that."