Dow Futures Brace for Volatile Week as Damages from U.S.-China Trade War Begin to Surface

Futures on the Dow and broader stock market rose sharply on Friday, but finished lower for the week as threats to U.S. and global economic health resurfaced.

Volatility is likely to simmer near the surface next week as attention shifts to U.S.-China trade negotiations. For all the talk of progress, both countries remain far apart on several core issues and China’s long-term approach to trade suggests urgency is not in the cards.

Dow Futures Slump

U.S. equity markets drifted lower this week, mirroring movements in the global futures markets. Dow Jones Industrial Average (DJA) futures declined 1% during the week, despite clawing back 1.3% on Friday.

Dow Jones Industrial Average ends a volatile week on a positive note Friday, gaining 345 points, or 1.3%, to 26,525.00. | Chart: Bloomberg

S&P 500 futures contracts rose 1.4% on Friday, but still finished down 0.4% for the week.

The CBOE Volatility Index, commonly known as the VIX, peaked closer to 22.00 on Thursday, signaling a severe loss of momentum in the stock market. The so-called “fear index” would eventually settle at 17.04 on Friday, little changed for the week.

U.S.-China Trade Talks Resurface

The United States and China are set to resume high stakes trade talks in Washington on Oct. 10-11. The meeting is being trumpeted as an important milestone in resolving a long-standing trade dispute that has ravaged the manufacturing industries of both countries.

U.S. manufacturing was said to have contracted in September for a second straight month, raising the specter of an imminent recession for the world’s largest economy. Although the latest nonfarm payrolls report showed unemployment was too low for there to be a real risk of recession, the Federal Reserve‘s actions suggest otherwise.

While the Fed never expects recession, it has cut interest rates at two straight meetings. Fed Fund futures prices currently peg the prospects of a third rate hike in October at 76.4%.

Interest rates are likely headed lower this month, according to Fed Fund futures prices. | Image: CME Group

In addition to manufacturing, the U.S. hardwood lumber industry has been hit especially hard by the trade war, with exports to China plunging by $615 million over a 12-month period.

Agriculture is another sector reeling from the effects of the tariff dispute. Several states, including Illinois, have seen their agricultural shipments to China plunge since Beijing implemented new restrictions on the industry. Tariff waivers allowed China to significantly up its purchase of American soy, which alleviated some of the strain on the industry.

At this rate, the U.S. economy likely recorded its third consecutive quarter of declining growth. According to the Atlanta Fed Bank, gross domestic product (GDP) likely grew just 1.8% annually in the third quarter, down from 2% in April-June.

Last modified (UTC): October 5, 2019 5:22 AM

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