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Stock market tanks

Recession fears make Trump backtrack in trade war with China
By Masao Suzuki |
August 14, 2019
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San José, CA - On Wednesday, August 14, the U.S. stock market tanked, with the Dow Jones Industrial Average down 800 points, or 3%. The technology-heavy NASDAQ index also fell 3% and the S&P 500 fell just shy of 3%. This is the third day in a row of major market moves: Down more than 450 points on Monday, up 375 points on Tuesday, and now down again.

The Monday move came on because of growing recession fears, but the stock market bounced back on Tuesday, when Trump announced that he was postponing the 10% tariff on imports from China on more than half of the goods originally scheduled to be tariffed September 1. The postponement came on cell phone, computers, toys and other goods that make up more than 75% of U.S. imports that come from China, as well as baby supplies deemed necessary. However more than $100 billion in imports from China are still on track to face tariffs next month. These are mainly consumer goods, with women and girls clothing among the hardest hit.

While Trump tries to come off as a tough guy and hard negotiator, the fact of the matter is that he blinked in the face of Chinese resistance. Trump also admitted for the first time that U.S. consumers would be hit, whereas before he maintained that China was paying the tariffs. The postponement allows stores to stock up for their holiday sales without paying the tariffs.

But despite the relief rally on Tuesday, on Wednesday things went from bad to worse. First came disappointing economic reports from China. Over the last ten years China has made a lot of progress in bringing down its overall trade surplus (selling more exports than it imports). By ramping up its imports, the Chinese economy has become ever more important to other countries’ economies, including for example, U.S. farm exports. While its economic growth is still awesome by any other large economy’s standards (still about 6% as compared to 2 to 3% in the United States and even less in Europe and Japan), any slowdown in Chinese economic growth will affect other countries.

Then, as the world turned, there came a report out of Germany that their Gross Domestic Product (GDP, or the total production of final goods and services) actually contracted by a small amount in the second quarter of this year. Germany has the largest economy in Europe and is the fifth largest in the world. Germany is also the world’s third largest importer of goods and services, so like China, any slowdown will impact other countries.

Then when financial markets opened in the United States, interest rates on the ten-year U.S. Treasury Bonds briefly fell below the interest rate on the two-year bond. This was another ‘inversion’ of the bond interest rate yield curve, where typically higher long term interest rates fall below shorter term ones, indicating the economy will be much worse in the future. It is seen as one of the strongest financial market warnings of a coming recession.

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