Trade uncertainties, economic recession fears drag down U.S. equities

A trader works at the New York Stock Exchange in New York, the United States, on Aug. 23, 2019. U.S. Stocks closed sharply lower on Friday after China announced its countermeasures against U.S. tariffs. The Dow Jones Industrial Average was down 623.34 points, or 2.37 percent, to 25,628.90. The S&P 500 was down 75.84 points, or 2.59 percent, to 2,847.11. The Nasdaq Composite Index decreased 239.62 points, or 3 percent, to 7,751.77. (Xinhua/Guo Peiran)

NEW YORK, Aug. 23 -- Market concerns about trade uncertainties and a possible economic recession were the major reasons why U.S. equities suffered a steep sell-off on Friday, analysts have said.

The Dow plummeted 2.37 percent, the S&P 500 was down 2.59 percent, and the Nasdaq decreased 3 percent.

China's Customs Tariff Commission of the State Council said in a statement on Friday that China will impose additional tariffs on U.S. imports worth about 75 billion U.S. dollars in response to the newly announced U.S. tariff hikes on Chinese goods.

A total of 5,078 U.S. products will be subject to additional tariffs of 10 percent or 5 percent. The tariff hikes will be implemented in two batches and take effect at 12:01 p.m. Beijing Time (0401 GMT) on Sept. 1 and at 12:01 p.m. (0401 GMT) on Dec. 15, respectively, according to the statement.

China's imposition of additional tariffs is a forced response to U.S. unilateralism and trade protectionism, the commission said.

The U.S. government announced on Aug. 15 that it will impose additional tariffs of 10 percent on Chinese goods worth about 300 billion U.S. dollars, effective on Sept. 1 and Dec. 15, respectively, in two batches.

Brian Rose, senior economist at UBS Global Wealth Management, said China's announcement is not surprising and is consistent with its measured approach toward retaliation against U.S. tariffs.

He said the move could increase the risk that U.S. President Donald Trump will decide to raise the recent tariffs from 10 percent up to 25 percent.

"In our view, 25 percent tariffs would cause considerable economic damage and greatly increase the probability of a U.S. recession in 2020," said Rose.

The news came at a time when the U.S. market has already been worrying about a possible economic recession contributed by trade tensions between the United States and its major trading partners.

The yield of benchmark U.S. 10-year Treasury note briefly traded under that of the 2-year note on Friday, the fourth time the recession indicator has been triggered since Aug. 14. The so-called yield curve inversion is seen as a recession signal by many investors.

Federal Reserve Chairman Jerome Powell delivered a much anticipated speech on Friday at the central bank's annual economic symposium in Jackson Hole, Wyoming.

Contrary to what the market had hoped, Powell did not give a clear signal about further interest rate cuts. He pledged to "act as appropriate to sustain the expansion," a phrase that he has used for several times in recent months.

While Powell noted that U.S. economy has continued to perform well overall, he pointed out three factors that are weighing on the favorable outlook, namely slowing global growth, trade policy uncertainty, and muted inflation.

He said the global growth outlook has been deteriorating since the middle of last year. Trade policy uncertainty seems to be playing a role in the global slowdown and in weak manufacturing and capital spending in the United States.

Powell talked at length about trade policy uncertainties. He said fitting trade policy uncertainty into the Fed's policy framework is a new challenge.

He said anything that affects the outlook for employment and inflation could also affect the appropriate stance of monetary policy, and that could include uncertainty about trade policy.

"There are, however, no recent precedents to guide any policy response to the current situation," said Powell.

Moreover, while monetary policy is a powerful tool that works to support consumer spending, business investment, and public confidence, it cannot provide a settled rulebook for international trade, said Powell.

"We can, however, try to look through what may be passing events, focus on how trade developments are affecting the outlook, and adjust policy to promote our objectives," Powell added.

Market reaction showed investors generally considered Powell's speech a positive signal on possible more accommodative monetary policies, as all three major indexes went up shortly after the speech, said Mark Otto, a senior trader at U.S. electronic market maker GTS.

Market expectations for another rate cut in September are at 100 percent, according to the Chicago Mercantile Exchange Group's FedWatch tool.

Otto said it is realistic to expect a 25-basis point cut in September, but a 50-basis point reduction like some people have been hoping for is very unlikely.

Analysts have noted that the speech had limited impact on the market as it contained no big surprises.

The Fed cut interest rates by 25 basis points in late July for the first time since the 2008 financial crisis. According to the minutes of the central bank's July meeting that was released on Wednesday, Fed officials were divided over whether to cut interest rates.

"Those minutes revealed a lack of consensus, with some participants wanting to leave rate unchanged, and others wanting to cut rates more aggressively. Even among those arguing in favor of a rate cut, there were a variety of views on why a cut was appropriate. Three broad categories for the cut were noted: signs of deceleration in economic activity; risk-management; and inflation. Powell's speech touched on each of these, including both positive and negative events," said Rose.

"We maintain our view that the Fed will cut rates by enough to get the yield curve out of inversion. At current market pricing that requires 75 basis points of additional cuts," he said.

Andrew Hunter, senior U.S. economist at Capital Economics, said in a note that Powell provided a little more clarity on Friday, suggesting the intensification of those downside risks in recent weeks could warrant more policy support.

"But he otherwise provided little guidance as to what developments would push the Fed into a more sustained easing cycle," Hunter added.

All of the 11 primary S&P 500 sectors traded lower on Friday. Energy and Technology sectors erased 3.37 percent and 3.3 percent, respectively, the top two laggards.

Twenty-nine of the 30 Dow component companies closed lower. Apple and Intel lost 4.62 percent and 3.89 percent, respectively, the worst performers of the day.

The Cboe Volatility Index (VIX), widely considered to be the best fear gauge in the market, jumped 19.12 percent to 19.87.