US stocks had the worst week in more than two years amid political turmoil in the White House and fears about a protracted global trade war.
Trade war concerns were stoked when the US administration unveiled plans to impose tariffs on up to $60bn in annual imports from China, designed to punish Beijing for its unfair industrial policies and theft of intellectual property. China said that it would impose tariffs on $3 billion worth of American products and made it clear the measures were in retaliation for US steel and aluminium tariffs announced earlier this month as a national security measure.
The US administration has given the EU, along with Australia, Argentina, Brazil, Canada, Mexico and South Korea, a temporary exemption from the 25 percent tariffs on steel and the 10 percent tariffs on aluminium, while negotiations continue, but President Donald Trump indicated that obtaining longer carve-outs would depend on their willingness to rectify what he sees as unfair trade practices.
Mr Trump signed a $1.3tn spending bill, which had been crafted by both Republicans and Democrats, to avert a US government shutdown on Friday, despite threatening earlier in the day that he might veto it as the spending bill did not help unauthorised immigrants known as “Dreamers. The signing, however, did little to assuage anxiety about US politics.
Markets in Japan and Germany suffered heavy falls on Friday. The Nikkei 225 index dropped 4.5 per cent, while the export-heavy Xetra Dax in Frankfurt finished down 1.8 per cent. The benchmark stock indices in Hong Kong and Shanghai were off 2.5 percent and 3.4 percent, respectively. The European Stoxx 600 index was down 0.9 per cent, hitting its lowest level since February 2017. Stocks exposed to global trade were among the sectors hit the hardest.
The S&P 500’s 6 per cent decline for the week was its biggest since the first week of January 2016. All of the S&P 500’s sectors finished lower on Friday. The Dow Jones Industrial Average fell 5.7 per cent for the week, also the worst week for the blue-chip gauge since January 2016. The S&P 500 and the Dow Jones Industrial Average moved into the red for the year. The Nasdaq Composite finished 2.4 per cent lower on Friday and shed 6.5 per cent for the week. Social media stocks came under heavy pressure amid the Facebook data scandal (Cambridge Analytica, a data analysis firm employed by the presidential campaign of Donald Trump, mined the personal data of 50 million Facebook users).
Mr Trump jettisoned National Security Adviser H.R. McMaster on Thursday evening. His replacement is a foreign policy hawk John Bolton, who thinks that a pre-emptive strike against North Korea would be “perfectly legitimate” and supports Mr Trump’s willingness to tear up the Iran nuclear deal unless European allies toughen their policies. The ouster of H.R. McMaster leaves defence secretary Jim Mattis, who advocates restraint in foreign policy, increasingly isolated as a moderating voice in the president’s inner circle.
The Bolton appointment came two weeks after Mr Trump fired with a tweet Rex Tillerson as secretary of state and picked the hawkish CIA director, Mike Pompeo, as his successor. Mr Tillerson’s departure followed Gary Cohn’s resignation as director of the National Economic Council (Mr Cohn had lost a White House battle over the imposition of tariffs on imports of steel and aluminium).
Cohn, McMaster and Tillerson acted as a moderating influence on policy. The falling number of moderates in the administration, therefore, raises the risk of conflicts with Iran and North Korea as both Mr Bolton and Mr Pompeo have advocated regime change in North Korea and Iran. There are increasing questions about how long Mr Mattis will last.
Mr Bolton’s appointment sent oil prices sharply higher as it raised expectations for the collapse of the Iran nuclear deal. Brent crude, the international benchmark, settled at $70.49 a barrel on Friday, up 2.3 per cent on the day, while US West Texas Intermediate was up 2.5 per cent at $65.89.
The Federal Reserve raised interest rates by a quarter point at the conclusion of its two-day policy meeting on Wednesday, as had been expected. The Fed said that the economy continues to strengthen and that it expects to increase rates another two times this year, with more rises in 2019 and 2020. The Fed’s “dot plot” suggests the Fed funds rate will hit 3.4 per cent by 2020. Officials raised their median estimates for economic growth this year to 2.7 per cent, up from 2.5 per cent in December. They now expect the unemployment rate to fall to 3.8 per cent this year and 3.6 per cent in 2019. Despite officials’ growing optimism, the yield on the benchmark 10-year US Treasury fell, ending the week at 2.82 per cent as investors sought the relative safety of government debt amid the stock market sell-off.
Official White House Photo by Joyce N. Boghosian
