The Dow Jones was hammered on Friday after a horrific U.S. PMI reading bludgeoned a stock market already vulnerable to the coronavirus outbreak and lingering uncertainty around the presidential election.
Adding to investor angst was the fact that China can activate the get-out clause in Donald Trump’s phase one deal, heightening the risk of another trade war escalation.
Minutes before the closing bell, the Dow Jones Industrial Average had plunged 282.33 points or 0.97% to 28,937.65.
The Nasdaq fell the hardest – more than 2% – and the S&P 500 lost around 1.2%.
A clear risk-off day in the commodity sector saw crude oil tumble more than 0.8%, while the price of safe-haven gold soared more than 1.7%.
U.S. bonds confirmed the massive move from risk. The 30-year Treasury note yield plummeted to 1.892%, an all-time low.
Friday brought a batch of terribly concerning U.S. economic statistics, as PMI data indicated the first contraction in business activity since the financial crisis.
Chris Williamson, Chief Business Economist at IHS Markit, blamed the unfolding health crisis in Asia and the upcoming election in November.
The deterioration in was in part linked to the coronavirus outbreak, manifesting itself in weakened demand across sectors such as travel and tourism, as well as via falling exports and supply chain disruptions.
However, companies also reported increased caution in respect to spending due to worries about a wider economic slowdown and uncertainty ahead of the presidential election later this year.
The reading will likely be alarming to Dow bulls, as it indicates that a recession may be about to strike the United States economy.
But some economists are taking a more optimistic view, as the following soundbite from Capital Economics research demonstrates:
We have a hard time believing the apparent message from the IHSMarkitPMI that the economy is on the brink of a recession.
Unless job creation and consumer confidence suddenly craters, it’s difficult to see how the new downside risks that have emerged in recent months would be enough to sink the entire economy.
Analysts’ confidence in U.S. consumer strength has been a common theme for some time, but recent evidence has shown that retail activity is not matching sentiment.
An elevated U.S. stock market has more to worry about than the basic economic impact of the coronavirus. The knock-on effect poses a serious political threat to the relationship between the Trump administration and Beijing.
As turmoil roils the Chinese mainland, Donald Trump’s much-vaunted “phase one” trade deal is unlikely to be fulfilled, as Nordea Research’s Andreas Steno Larsen warns:
The Phase 1 deal is dead as it looks right now. The last sentence in the deal says that they will renegotiate in event of “force majeure.”
The big question is if Trump’s advisers will dare to communicate that before November 2020? We doubt it. A trade war 2.0 showdown looks likely for 2021.
This should undoubtedly be troubling for the Dow Jones over the long term. Yet the more immediate impacts of the coronavirus on China’s economy and the rise of Bernie Sanders will make it hard for investors to look beyond what could be a volatile few months for global stock markets.
The World Health Organization (WHO) is watching the virus with trepidation, stating today that the window to contain the outbreak is closing. And that most nations are not acting fast enough.
Tedros Adhanom Ghebreyesus, director-general of the WHO, stressed his concern about the increase in transmissions of the coronavirus in people with no history of China travel.
On a very shaky day for the Dow 30, it was unsurprising to see domestic defensive play Walmart rally more than 0.65%.
Confirming the flight out of growth, restaurant giant McDonald’s ticked 0.2% higher.
It was not such a good day for two of the Dow Jones’ biggest stocks. Apple lost more than 2.8%, while Boeing slid around 1.55%.
But even they weren’t as ugly as Microsoft, whose stock dove more than 3.7%.
Nike, with its incredibly China-centric business model, fell more than 2.7%.
Last modified: June 12, 2020 10:30 PM UTC