By CCN Markets: The Dow Jones Industrial Average traded flat on Monday, despite ominous trade warnings from the White House over the weekend.
In an interview with ABC News on Sunday night, Trump said he was ready to go all in on tariffs in a bid to twist China’s arm. The president threatened to double the value of Chinese goods subject to tariffs from $250 billion to over half-a-trillion.
“We have … right now, we’re getting 25 percent on $250 billion. And in the end, we’re going to get probably 25 percent or so. And it could be even increased. But 25 percent on $550-$585 billion.”
Dow Jones Futures Trade Flat Monday
At 7.13 am ET, Dow Jones Industrial Average (DJIA) futures traded flat, up a mere 3 points (0.01 percent). Traders are in wait-and-see mode as the Federal Reserve prepares to meet this week.
Trade War to Derail Dow Jones Optimism?
The Dow has mounted a strong 5 percent rally in June on hopes of an interest rate cut at the Federal Reserve. On Monday, traders held their breath as the Fed prepares to meet for the Federal Open Market Committee (FOMC).
Expectations of a rate cut this week are low, currently priced at 21 percent. But the market is overwhelmingly pricing in a rate cut in July – at 85 percent.
Traders hope a cut in the base rate will inject stimulus into the market and buoy stock market valuations.
But are Dow traders ignoring the more destructive factors at play? Namely, an escalation of trade war tensions and tariff threats.
Trump Is “Ready to Proceed with Tariffs” on All Chinese Goods
Commerce Secretary Wilbur Ross appeared to echo the president’s threat in a CNBC interview on Monday. Ross explained:
“The president is perfectly happy with continuing the tariff movements that we’ve already announced, as well as imposing the new ones that he has temporarily suspended.”
He went on to say that a trade deal resolution at the upcoming G20 is unlikely. Although Trump and Xi JinPing will be in attendance, there’s little chance of renegotiating a 25,000 page document, he said.
How Will the Dow Respond?
Traders are perhaps naively pinning all their hopes on a string of interest rate cuts, while ignoring the threat of future tariffs.
If the Fed shocks the market with a hawkish tone this week, combined with amped up trade threats, we could face an epic Dow sell off.
However, as CCN reported, the president is unlikely to let the stock market fall too far on his watch. With a re-election campaign on the horizon, Trump will almost certainly step in should the worst happen.