US stocks stage ‘nice rebound’ despite escalating trade tension with China

A positive jobs report helps Wall Street traders shake off their recent jitters, even as some stocks suffer from the tariff dispute

PUBLISHED : Saturday, 07 July, 2018, 7:36am
UPDATED : Saturday, 07 July, 2018, 7:36am

The trade dispute between the US and China escalated on Friday, but Wall Street focused on a solid jobs report instead, and after a wobbly start, American stocks mounted a broad rally, shaking off two consecutive weekly losses.

Growing jitters in recent weeks over a stepped-up trading dispute between the world’s two largest economies had weighed on the markets well ahead of Friday, when Beijing and Washington launched duelling tariffs on billions in goods.

US, China begin ‘biggest trade war in economic history’ 

“The markets had already sold off the prior two weeks,” said Dan Heckman, national investment consultant at US Bank Wealth Management. “The market probably had built that expectation in already and today we’re seeing a nice rebound.”

A solid pickup in hiring by US employers last month also helped keep investors in a buying mood.

The S&P 500 index rose 23.21 points, or 0.8 per cent, to 2,759.82. The Dow Jones Industrial Average gained 99.74 points, or 0.4 per cent, to 24,456.48. The Nasdaq composite added 101.96 points, or 1.3 per cent, to 7,688.39.

The market is counting on this to subside. If [this continues] to escalate, that will cause some problems
Erik Davidson, chief investment officer at Wells Fargo Private Bank

The Russell 2000 index of smaller-company stocks picked up 14.57 points, or 0.9 per cent, to 1,694.05. The US put a 25 per cent tax on $34 billion worth of Chinese imports on Friday.

China retaliated with taxes on an equal amount of US products, including soybeans, pork and electric cars, calling the move the start of the “biggest trade war in economic history.”

Though the first exchange of tariffs is unlikely to inflict much economic harm on either nation, the damage could soon escalate.

US President Donald Trump, who has claimed that winning a trade war would be easy, has said that he is prepared to drastically raise tariffs on more Chinese imports.

Mounting tariffs could raise costs across the board for consumers and businesses, slowing growth and investment and hurting companies that rely on imported parts to make their goods.

Chinese company profits face collateral damage in escalating US trade war

Despite the market’s gains on Friday, much damage has already been inflicted on stocks that would stand to lose in a protracted trade battle with China.

American companies that do a lot of business with China have seen steep drops in their stock prices in the past few weeks.

Aircraft maker Boeing, which relies on China for 12.3 per cent of its sales, according to FactSet, has seen its stock fall 9.9 per cent over the last month as the trade tensions with China worsened.

Heavy equipment maker Caterpillar, for whom China is also its second-biggest market after the US, is off 13.5 per cent over the same time.

Why China will not start a currency war as trade tension boils over

Liquor maker Brown-Forman, whose products include Jack Daniels, is off 15 per cent since late May. Whiskey, along with soybeans, pork and cheese, is among the products China is slapping retaliatory tariffs on.

As the prospect of Chinese tariffs on soybeans grew in recent weeks, the price of soybeans has fallen sharply. Soybean futures have fallen from $10.42 a bushel in late May to $8.95 on Friday, a drop of 14 per cent.

That hurts US soybean farmers and could also have an impact on makers of farm equipment, such as Deere & Co. Deere’s stock has fallen 11.7 per cent over the last month. Last year China bought 30 per cent of the soybeans produced in the US.

“The market is counting on this to subside,” said Erik Davidson, chief investment officer at Wells Fargo Private Bank. “If they get an indication that this will continue to escalate, that will cause some problems.”

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Investors also welcomed new data on Friday from the government showing that US employers kept up a brisk pace of hiring last month, without having to hike wages much.

Markets have been watching to see if tight labour market conditions would force wages higher, a sign of inflation. The Labor Department said that US employers added 213,000 jobs in June.

Average hourly pay rose just 2.7 per cent from a year earlier, which means that after adjusting for inflation wages remain nearly flat.

Major indexes in Europe finished higher. Germany’s DAX added 0.3 per cent, while France’s CAC 40 rose 0.2 per cent. Britain’s FTSE 100 gained 0.2 per cent.