A trade spat between the United States and China escalated this week, triggering a mass exodus from global equities. For Wall Street, this amounted to the worst start to the second quarter since the Great Depression.
On the crypto front, markets failed to sustain a mid-week rally as correlation between equities and digital assets intensified. In the process, bitcoin asserted greater dominance over the market, as demonstrated by its growing share of the total pie.
Epic Meltdown on Wall Street
After a disastrous start to the week – and month – U.S. stocks turned things around between Tuesday and Thursday. However, volatility returned in a big way on Friday as the major indexes plunged more than 2%.
The Dow Jones Industrial Average plunged 572.46 points, or 2.3%, to close at 23,932.76. All 30 index members recorded losses, with the lowest being -0.5%.
The broader S&P 500 Index closed down 2.2% at 2,605.47, with six of 11 sectors falling 2% or more.
Meanwhile, the technology-driven Nasdaq Composite Index fell 2.3% to 6,915.11.
Implied volatility, as expressed through the CBOE VIX, surged more than 13% on Friday to close at 21.49, which is above the historic mean.
Friday’s selloff was triggered once again by escalating trade tensions between China and the United States. On Friday, the White House not only defended President Trump’s new tariff policy, but underscored the administration’s intent to pursue harsher measures unless China adopts fairer trade practices.
“Year after year, China continues to distort global markets and harm U.S. businesses and consumers with unfair trade practices,” the White House press office said in a statement.
China has already proposed to match President Trump’s $50 billion tariff proposal with its own hit list of American-made goods. However, it has also signaled readiness to buy more American-made semiconductors.
While most analysts have been fixated on what the U.S. has to lose in a trade war, China is also at risk because it cannot match the U.S. in duties. The reason is simple: China only imports about $131 billion in U.S. goods, which is a fraction of what the U.S. consumes from China each year.
In retaliation to China’s retaliation, Trump threatened an additional $100 billion in duties – that’s on top of the $50 billion already pledged. That total already exceeds China’s total U.S. imports for the year.
Trump explained his reasoning in the following tweet:
When you’re already $500 Billion DOWN, you can’t lose!
— Donald J. Trump (@realDonaldTrump) April 4, 2018
There’s strong reason to believe that the tit-for-tat will continue despite China willingness to negotiate trade terms. It remains to be seen how Beijing will react to harsher border taxes in the future.
Jobs Miss Adds to Negativity
A disappointing jobs report on Friday also added to the market’s woes after the Labor Department reported lower-than-expected nonfarm payrolls numbers.
U.S. employers added a mere 103,000 workers to payrolls last month, nearly half the rate analysts were expecting. Labor economists revised up the tally for February to reflect growth of 326,000.
The jobless rate held steady at 4.1% as workforce participation slipped. Analysts had forecast a slight dip in unemployment and a large pick-up in participation.
Average hourly earnings picked up faster than expected, a sign of stronger inflation.
Earnings rose 0.3% in March, up from 0.1% in February and slightly ahead of forecasts calling for 0.2%. This translated into year-over-year growth of 2.7%.
A Mediocre Week for Cryptocurrencies
It was another down week for cryptocurrencies, with the total market cap shedding $13 billion over the seven-day stretch. The market peaked at $283.3 billion on Tuesday but has since declined to around $250 billion.
Bitcoin was down for most of the week, with prices falling below $6,600 on multiple occasions. The downturn threatened a bear-market reversal as prices approached the recent low of $6,425.
Bitcoin’s dramatic decline since the start of the year may have a silver lining: it means speculators, who are largely responsible for price swings, have abandoned the market. Their return could depend on how regulations evolve as well as how successful exchanges are in bringing institutional traders on board.
The Week Ahead
U.S. corporate earnings, inflation data and Mark Zuckerberg’s congressional testimony will dominate the headlines next week. Many traders are looking to corporate results to smooth out the volatility on Wall Street given the lofty expectations on the Q1 earnings quarter. However, surprise misses could shake an already tumultuous market and give traders more reason to exit the asset class.
Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.
Featured image courtesy of Shutterstock.