Recession Alert. All three major stock market indexes closed in the red on Wednesday as trade war concerns and an inverted yield curve spooked investors about recession risks ahead. Chinese newspapers warned in strongly worded commentaries that Beijing is ready to weaponize so-called rare earth metals in the trade war with the U.S. In today’s After the Bell, we…
- wonder what else the U.S. and China could use as a weapon in the trade war;
- look at the warning signs in the Treasury market;
- and speculate where the market might go next after breaking a key support threshold.
Earth and Oil
Stocks continued to drop as trade headlines kept deteriorating. The Dow Jones Industrial Average dropped 221.36 points, or 0.87%, to close at 25126.41. The S&P 500 fell 19.37 points, or 0.69%, to close at 2783.02. And the Nasdaq Composite lost 60.04 points, or 0.79%, to finish at 7547.31.
Expectations that a trade deal can be reached in the near-term are quickly dissipating, and investors are now watching for what else could get caught in any escalation between the U.S. and China.
Chinese President Xi Jinping’s visit to a rare earths plant last week had sparked speculation that Beijing would use rare earth metals—a group of 17 chemical elements used in everything from high-tech consumer electronics to military equipment—as a weapon in the trade war.
Although China hasn’t explicitly said it would restrict U.S. access to the obscure materials, commentaries from Chinese media on Wednesday strongly implied the possibility. China is the global leader in rare earth minerals and a major exporter to the U.S. If supplies of the metals shrink and values soar as a result, American technology and industrial sectors could feel the pain.
Other possible avenues for retaliation from China include devaluing its currency and selling Treasuries. Some also speculate that China could shrink its energy imports to push oil prices lower. That would improve China’s account balance while creating some pain for U.S. energy producers, like it did in 2016 when China’s economy shuddered. Still, Gavekal Research’s Louis Gave wrote in a note Wednesday that it would be a big gamble for China, because doing so would make China very vulnerable if the U.S. takes moves to boost oil prices.
Investors fled to safer corners as uncertainties remained. The Treasury market has been rallying for most of this year, but the rally has picked up more speed of late. The 10-year Treasury note’s yield dropped to 2.18% on Wednesday, its lowest level since 2017. The benchmark yield fell below the 3-month bill yield on May 23, and has been there ever since.
It’s the first time since March that this pricing anomaly—known as a yield-curve inversion—has lasted longer than one day. If they persist long enough, yield-curve inversions are considered to be a signal of future recession. Historically, when that part of the curve has been inverted for 10 days, a recession has followed within the next two years, according to Bianco Research.
And the stock market is finally paying attention to warning signs from the Treasury market. The S&P 500 is down 5.5% for the month, and the benchmark index fell below its 200-day moving average during Wednesday’s trading before inching above that line by the end of the day. Still, Lori Calvasina at RBC Capital Markets thinks the pullback in the S&P 500 so far “has been mild compared to most of the periods of consolidation that occurred within 2010, 2011, and 2016 rallies.”
Write to Evie Liu at [email protected]