By CCN: Dow Jones futures tumbled in early trading Monday as Wall Street firms triggered multiple recession warnings. The Dow is poised to open in the red as traders initiating a triple-digit selloff overnight. Risk-off mode is firmly engaged.
JP Morgan Chase and Co. said the likelihood of recession in 2019 is now at 40 percent, up from 25 percent last month. Morgan Stanley warned that a recession is imminent unless tensions cool between the US and China.
Morgan Stanley put out a 🚨⚠️🚨 note today: "Our cycle indicator has shifted out of 'expansion' to 'downturn' for the 1st time since 2007."
"This phase-change has historically meant a worse backdrop for returns and higher chances of recession or a bear market…" #economy
— Heather Long (@byHeatherLong) June 2, 2019
Dow Jones futures in triple-digit fall overnight
Dow Jones Industrial Average (DJIA) futures fell as much as 180 points on Monday, pointing to a weak open. At 6.01 ET, dow futures recovered slightly to 24,730, still down 90 points (0.36 percent).
S&P 500 futures fell 8.5 points (0.31 percent) to 2,744. The tech-heavy Nasdaq Composite index slumped 34.75 points lower (0.49 percent) to 7,098.
Markets are “underestimating” the recession risk
Morgan Stanley analyst Chetan Ahya said that Wall Street is finally waking up to the reality of Trump’s China trade war. He told Bloomberg that traders have so far underestimated the global impact of US tariffs and China’s retaliation.
“Recent conversations with investors have reinforced the sense that markets are underestimating the impact of trade tensions… they appear to be overlooking its potential impact on the global macro outlook.”
We are getting unusually different readings of the economy right now. Over the last four quarters GDP grew by a strong 3.2%. But another measure of the same concept, GDI, was a tepid 1.8%.
We have rarely seen gaps this large. The last time we did was in the Great Recession.
— Jason Furman (@jasonfurman) May 30, 2019
In other words, there’s more room to fall yet and recession bells are ringing. The Dow Jones Industrial Average (DJIA) pumped towards all-time highs in 2019. But the momentum was knocked out of the market as Sino-American trade relations broke down. The DJIA snapped a four-month winning streak to end May with the first monthly loss of the year.
Trump extends trade threats to Mexico
Dow traders are also weighing Trump’s latest tariff threat on Mexico. The US president has warned of 5 percent tariffs on Mexican imports unless the country acts on illegal immigration into America. The tariffs will rise monthly until they reach 25 percent.
On June 10th, the United States will impose a 5% Tariff on all goods coming into our Country from Mexico, until such time as illegal migrants coming through Mexico, and into our Country, STOP. The Tariff will gradually increase until the Illegal Immigration problem is remedied,..
— Donald J. Trump (@realDonaldTrump) May 30, 2019
JP Morgan warned the move would hit the US economy, even if the US and Mexico reached a quick agreement.
“Even if a deal is quickly reached with Mexico, which seems plausible, the damage to business confidence could be lasting, with consequences that might still require a Fed response.”
The Wall Street firm thinks the Federal Reserve will be forced to brace against a possible recession. A warning note to investors predicts the Fed will slash interest rates twice in 2019 if the tariffs reach 25 percent.
Dow in trouble as China blames US for trade collapse
The Dow is poised to extend losses on Monday as China issued a controversial white paper. The paper hit back at Trump and blamed the US for the breakdown in negotiations.
“The U.S. government accusation of Chinese backtracking is totally groundless. It is reckless to accuse China of ‘backtracking’ while the talks are still under way.”
Traders are no longer expecting a trade deal before the upcoming G20 meetings. In fact, the appear to be pricing in the likelihood of a long and painful negotiation period.