US: Equities guided by trade tensions – BBH

The increase in equity market volatility preceded the escalation of trade tensions, but now the latter appears to be stymying attempts to stabilize the former, according to analysts at BBH.  

Key Quotes

“The equity market was its own dynamics, and last year's low volatility was an anomaly and payback, as in reversion to mean, is painful.”

“Following the list of the specific Chinese goods that would be hit with US tariffs for the intellectual property rights violation claims and the list of US goods that China would target, the S&P 500 posted a reversal pattern in the middle of the last week.  It traded on both sides of the previous day's range and then closed above the previous day's high.  There was follow-through buying on Thursday, but Trump threat to double down by instructing the US Trade Representative to identify an additional $100 bln of Chinese goods to slap an additional levy threatened fresh escalation and saw stocks unwind their gains.”

“The S&P 500 managed to finish last week above its 200-day moving average, but it was still around a percentage point lower than when European markets closed.  The cuts in the corporate tax schedule are expected to generally lower the effective tax rate as well.  Exemptions (popularly known as loopholes) were mostly untouched.  Some multinationals, including apparently some financial institutions, will have a tax obligation for retained earnings overseas, whether or not they repatriate it.  Earnings expectations may be preventing or deterring a capitulation in the equity market.”