Trade wars return with a vengeance

  • US tariff threats and Chinese shutdown threats rock stocks
  • “Fear index” shoots to highest level since March
  • Stocks rebounded, VIX pulled back, as session progressed

Oh yeah, trade wars.

Let’s face it, the US–China tariff staredown hasn’t been front-and-center in the market discussion for a while, pushed aside by earnings season, new record highs for the US market, and (let’s face it again) tariff fatigue.

There’s a simple way to show how surprised the market was by the White House’s latest tariff threat and Beijing’s pull-the-plug-on-the-talks counterthreat—and it wasn’t the 2%-plus drop in the E-mini S&P 500 futures (ESM9) on Sunday night, although that was a big hint.

It was yesterday’s early move in everyone’s favorite “fear” gauge, the Cboe Volatility Index (VIX), which tends to rise when stocks are falling, and really rise when the market is experiencing exceptionally high levels of bearish anxiety (chart below).

S&P 500 (SPX) and Cboe Volatility Index (VIX), 3/14/19–5/7/19. S&P 500 (SPX price chart, VIX price chart, fear index. Trade-war ceasefire ends, VIX skyrockets.

Source: Power E*TRADE

Basically, the VIX’s 39% jump on the open—a move it has matched or exceeded only five other times—was the market saying, “Hey, didn’t see that one coming.”

Opinions about the significance of renewed hostilities appeared to be mixed, with some sounding the alarm about the long-term economic risks posed by a US–China trade war,1 and others arguing the latest flare-up was posturing (on both sides) to improve bargaining positions.2

The chart also shows that opening print (17.85) was the VIX’s intraday high and, similarly, the SPX had climbed well off its low (and above its opening price) before the trading session was half over. In other words, fear appeared to peak at the beginning of the trading session and ease as the day wore on.

Those hardy souls who went long SPX futures or ETFs on the open enjoyed a nice up move, but traders now must try to determine whether yesterday was just a one-off, or the opening shot in a potentially larger skirmish. After all, around 1 p.m. ET, the SPX was still down around -1%, and the VIX was up a hefty 29%, so it wasn’t as if every ounce of market fear had evaporated.

Moves triggered by big surprises often get reversed quickly, but not necessarily immediately.

Two things to consider:

1. It’s only happened 10 other times (and the last time was June 24, 2016), but after days like yesterday, when the VIX has opened up 20% or more but reversed to close below the opening price, the SPX has tended to close lower the next one or two days. After five days, though, the index was up 1.1%, on average.3

2. If past tariff episodes are any guide, yesterday’s threats could soon give way to tomorrow’s warm embraces (and, of course, more threats the day after that). It’s a pattern that’s played out many times over the past year or so. Some traders may be waiting for the next pronouncement.

Moves triggered by big surprises often get reversed before too much time passes, but not necessarily immediately. This is the stuff volatility dreams are made of. Traders may want to keep an eye on their Twitter feeds.

Market Mover Update: Oil spiked yesterday in the opposite direction as the VIX, with the June WTI crude oil futures (CLM9) dropping nearly 3% to $60.04 before rallying into the green.

Today’s numbers (all times ET): Jolts (10 a.m.), Consumer Credit (3 p.m.).

Today’s earnings include: Allergan (AGN), Clovis Oncology (CLVS), Emerson (EMR), LGI Homes (LGIH), Regeneron Pharma (REGN), Spark Therapeutics (ONCE), Aurora Cannabis (ACB), Electronic Arts (EA), Lyft (LYFT), Marriott (MAR), Match Group (MTCH), Qorvo (QRVO), TripAdvisor (TRIP).



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1 Reuters. Warren Buffett says U.S.-China trade war would be 'bad for the whole world'. 5/6/19.

2 Market bull skips high-flying FAANG names in favor of consumer plays. 5/6/19.

3 Supporting document available upon request.

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