Escalating trade dispute
Along with other major US stock indices, the Dow Jones Industrial Average made back early losses and was firmer in early trade on Thursday. Initially, sellers had emerged after Wednesday’s close as President Trump declared a national emergency over threats against US technology. Reuters reported that the Commerce Department was adding Huawei and 70 of its affiliates to a list making it more difficult for the telecoms giant to trade with US companies. The decision comes at a tricky time after US/China trade talks broke down last week with both sides threatening fresh tariffs on each other’s goods. China will see this latest move from the US as an escalation which will make it more difficult to engineer a face-saving resolution to the trade dispute. This comes as there has been a significant hardening of nationalist sentiment in China’s state media suggesting an entrenchment which was already set to make future negotiations more difficult.
Yesterday equity markets came under pressure in early trade following weaker-than-expected Chinese data on Industrial Production, Retail Sales and Fixed Asset Investment. These releases support the view that China’s economic growth is continuing to slow, giving ammunition to the Trump Administration’s claims that a protracted trade dispute is far more damaging to China than the US. However, there was also some weak US data as Retail Sales fell 0.2% in April on expectations of a 0.2% increase. The decline came on the back of weak motor vehicle sales. Despite this, losses across equity markets were limited as investors believe that Chinese policymakers will respond to any further signs of economic weakness by providing more monetary and fiscal stimuli. Meanwhile, the US Federal Reserve remains dovish and markets continue to price in a rate cut before the end of this year.
EU tariffs delayed
Later in the day, investors found themselves reacting to political headlines once again after it was announced that President Trump planned to delay imposing tariffs on EU auto imports by six months. Global stock indices rallied sharply as this delay means that the Trump Administration can focus on the trade dispute with China rather than getting diverted in negotiations with Europe. It also suggests that Trump is preparing for Chinese negotiations to drag on beyond the G20 meeting in Osaka at the end of next month.
Dow Jones charts
The first thing to notice about the recent behaviour of the Dow is how it has failed to break convincingly below its 200-day Exponential Moving Average (EMA) which currently comes in just below 25,300. We can see the significance of this moving average when we look back and see how it held as support between February and July 2018. Going on a couple of months, there were two false breaks before support finally crumbled on the third attempt last December. So it’s worth keeping a close eye on this going forward.
Adding in the Ultimate Oscillator (a momentum indicator) we can see that despite the sell-off in the Dow over the last couple of weeks, the oscillator remains a long way above ‘oversold’ conditions. This is despite briefly falling below the 200-day EMA. This contrasts with how the oscillator behaved when the Dow tested the 200-day EMA in the first half of 2018. This could be interpreted as meaning investors are more comfortable with the level of the index today than they were back then. This makes some sense given that, despite some volatile periods, the Dow is little-changed from early February last year.