Today represented a classic example of the old market adage “buy the rumor, sell the news.” It also offered two different takes on that strategy from the stock and bond markets. Ultimately, there was a twist by the end of the day.
First off, let’s clear up rumors. The words in the quip aren’t ideal. Many times, markets’ first reaction is actually to NEWS, and it’s simply more timely news that sends traders scurrying back in the other direction.
In today’s case, the news came courtesy of a Trump tweet over the weekend that announced plans to increase tariffs on Chinese imports. In and of itself, the tweet wasn’t a huge deal and likely would have been seen as a negotiation tactic were it not for separate news that US/China trade talks were canceled. Taken together, it seemed that a trade deal was in jeopardy.
That was worth a big drop in stocks and a big rally in bonds. Stocks recovered fairly quickly and bonds eventually gave up some of their gains after separate news hit suggesting the Chinese trade delegation would still be coming to Washington this week.
With that, it seemed that the case was closed. Markets panicked, found a reason to panic a bit less, and would move on to the next day. But a moment before the only hour of the day where stocks and bonds completely stop trading, another set of headlines came out that added validity to initial “rumor.” Mnuchin confirmed to tone of the talks had shifted and Lighthizer said China went back on its trade deal provisions. In addition, he confirmed the plan to jack up tariffs as the Trump tweet suggested. Stocks and bonds only had a split second to trade that news and it took yields back to the lowest levels of the day.
Traders will need to decide how much of what they’re seeing is part of the negotiation process and how much suggests a legitimate possibility of lasting break-down in US/China trade relations. I doubt anyone is ready to assume all hope is lost just yet, but markets will have to account for that risk until they get the all-clear. Until that happens, it’s good for bonds.