Stocks Sink, Bonds Rally on Trump's Metals Duties: Markets Wrap

(Bloomberg) -- U.S. stocks plunged and Treasuries climbed Thursday after U.S. President Donald Trump promised to impose substantial tariffs on foreign metals, drawing a rebuke from a manufacturing industry group and the European Commission.

The S&P 500 Index briefly fell below its 100-day moving average while the Dow Jones Industrial Average dropped more than 400 points as Trump added to earlier confusion on the fate of proposed tariffs by announcing the levies in a meeting with industry executives. The Institute for Supply Management called the proposal a “big mistake.” European Commission President Jean-Claude Juncker said Europe will respond “firmly” to any new tariffs. And Federal Reserve Chairman Jerome Powell earlier praised the benefits of trade.

“Trump made the announcement about tariffs and it dropped,” said Donald Selkin, New York-based chief market strategist at Newbridge Securities Corp. “It would raise the price of autos, look at the auto stocks. It would raise the price for items that use steel and aluminum.”

The market reaction was uneven. While industrial companies in the S&P 500 tumbled, U.S. Steel Corp. advanced 5.7 percent and steel-products company Nucor Corp. gained 3.5 percent. Automakers led decliners as Ford Motor Co. and General Motors Co. added to losses already sparked by weak sales numbers. The Russell 2000 Index posted the smallest loss among major indexes as the bulk of its members derive most of their sales in the U.S.

“You could see earlier in the day when investors thought the president was going to have a listening session regarding tariffs the market went positive,” said Quincy Krosby, chief market strategist at Prudential Financial Inc. “All of those stocks that have steel or metal, they slid up. Then of course when he announced tariffs you saw the market pull back.”

The news sparked a bout of volatility, with the Cboe’s VIX measure climbing past 23 from less than 20 earlier. The euro, British pound and yen all rose versus the greenback, which pared earlier gains. Mexico’s peso fell. And Treasuries surged, with yields on the 10-year note sliding to 2.8 percent.

“Bonds are providing a nice shock absorber here,” said Gene Tannuzzo, a portfolio manager at Columbia Threadneedle Investments. “In late January, stocks and bonds were declining together as fears of higher interest rates impacted risk appetite. Now, however, it appears that bond yields have risen sufficiently high to allow them to provide a buffer on bad days for stocks.”

Investors also digested Senate testimony by the Fed’s Powell, who called for gradual interest rate hikes and said the economy wasn’t overheating. Traders were on edge during Powell’s second day of Congressional testimony after his comments on Tuesday about the strength of the U.S. economy opened the door to speculation that the central bank plans to quicken the pace of monetary tightening, a move investors worry could derail growth.

“In many ways, the Fed is going to be considering things against a backdrop of an economy that’s expanding above trend with excess demand and no spare capacity, and against a backdrop of pretty strong fiscal stimulus,” said David Page, senior economist at AXA Investment Managers. “The Fed is actually going to be wondering whether or not four rate hikes are going to be enough this year.”

Elsewhere, the Stoxx 600 Index fell as some companies missed their earnings estimates and manufacturing data showed that growth may have peaked. The U.K. pound was flat after the European Union published a draft Brexit treaty, squaring off with British Prime Minister Theresa May. The Australian dollar dropped after business investment unexpectedly fell in the final three months of last year.

Terminal users can read more in our markets blog.

Here are some key events scheduled for this week:

• Federal Reserve Bank of New York President Bill Dudley speaks this week.
• U.K. Prime Minister Theresa May delivers a speech Friday on Britain’s relationship with the European Union.

These are the main moves in markets:

Stocks

• The S&P 500 fell 1.4 percent to 2,677.28.
• The Dow Jones Industrial Average dropped 1.7 percent, or 427 points, to 24,597.83.
• The Stoxx Europe 600 slid 1.3 percent.
• The MSCI All-Country World Index declined 1 percent.

Currencies

• The Bloomberg Dollar Spot Index slipped 0.3 percent.
• The euro added 0.6 percent to $1.2264.
• The British pound gained 0.1 percent to $1.3773.

Bonds

• The yield on 10-year Treasuries declined five basis points to 2.81 percent.
• Germany’s 10-year yield retreated one basis point to 0.64 percent, the lowest in five weeks.
• Britain’s 10-year yield lost three basis points to 1.47 percent, the lowest in a month.

Commodities

• West Texas Intermediate crude decreased 0.4 percent to $61.38 a barrel.
• Gold declined 0.2 percent to $1,315.57 an ounce, the lowest in seven weeks.

--With assistance from Joanna Ossinger Randall Jensen Jeremy Herron and Andrew Dunn

To contact the reporters on this story: Sarah Ponczek in New York at sponczek2@bloomberg.net, Kailey Leinz in New York at kleinz1@bloomberg.net.

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Eric J. Weiner

©2018 Bloomberg L.P.