US stocks ended near the lows on Friday, as stunned traders, disillusioned investors and indifferent algos looked haplessly to one another for answers.
But there were no answers to be had. Donald Trump lost his cool and, during a fit of rage, likened his Fed chair to the Communist autocrat with whom the US is engaged in an increasingly intractable economic cold war.
Trump, who we learned this week cannot even suffer the slight of being told he can’t buy Greenland, was in no mood to digest retaliatory tariffs from China. He took his frustrations out on Jerome Powell and the rest, as they say, is history.
The VIX had another outsized move to the upside and US stocks careened nearly 3% lower, in the third bloodbath of the month (there have been three days in August during which the S&P has fallen in excess of 2.5% in a single session).
It was the fourth weekly loss in a row, the worst stretch since May, when Trump broke the Buenos Aires truce.
Tech and energy shares were bludgeoned. The SOX fell a truly heinous 4.3% in one of the five worst sessions of 2019.
Energy shares are riding (another) horrendous streak of weekly losses.
Gold at $1,537 is basically just escape velocity at this point, with the prospect of negative real yields and the flight-to-safety turbocharging an already furious rally.
In the same vein, the Treasury ETF is on track for one of its largest monthly gains since the crisis.
After the bell, Trump raised tariff rates and other measures are likely forthcoming, especially if China lets the yuan fall further next week. One imagines Steve Mnuchin and Larry Kudlow urged caution, while Peter Navarro argued for a “fire with fire” approach. (Navarro was live on Fox Business when the news started coming in on Friday morning.)
Trump has likely increased the odds of more rate cuts from the Fed, but the problem is that past a certain point, monetary policy will not be able to cushion the blow to sentiment from an all-out trade war with China. With consumers becoming more concerned about a possible recession in the US, the administration would do well to avoid days like Friday on Wall Street like the plague.
Remember, when it comes to the biggest risk from the trade conflict to US growth, it’s not the mechanical impact of the tariffs that really matters – rather, it’s the financial conditions impulse, which is sensitive to big declines in equities.