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New front in trade war sparks sell-off in equities
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Widespread downturn leaves investors with few places to hide
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By DAVID BERMAN
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Tuesday, June 26, 2018 – Print Edition, Page B1


U.S. and Canadian stocks suffered their worst one-day decline in several months on Monday, amid rising global trade tensions and their potential impact on the world economy.

The widespread downturn left few safe places for investors to hide.

Economically sensitive sectors, such as energy, industrials and technology, bore the brunt of the sell-off.

But defensive Canadian utilities and U.S. consumer staples also struggled, echoing some of the more dramatic downturns that defined the stock market earlier this year.

Even the so-called FAANG stocks - Facebook Inc., Apple Inc., Amazon.com Inc., Netflix Inc. and Google's parent company, Alphabet Inc. which have been largely immune to concerns about escalating trade threats exchanged between the United States and China - fell more than 2 per cent each (6.5 per cent, in the case of Netflix).

"We expect growth in the U.S. economy to slow next year, but if trade tensions escalate, the slowdown could happen sooner and be more severe, putting the FAANGs under pressure," Ingvild Borgen Gjerde, a markets economist at Capital Economics, said in a note.

The Dow Jones Industrial Average closed at 24,252.80, down 328.09 points or 1.3 per cent. The broader S&P 500 closed at 2,717.07, down 37.81 points or 1.4 per cent, marking its biggest one-day decline since early April. In Canada, the S&P/TSX Composite Index closed at 16,183.96, down 266.18 points - for its worst decline since March.

The index is once again slightly under water for the year.

The fireworks in the stock market follow an escalation in the back-and-forth threats to global trade, suggesting that investors are becoming increasingly worried that political rhetoric is moving toward actual policy.

News outlets reported that the U.S. Treasury Department will announce later this week new restrictions that will block Chinese-owned firms from buying U.S. companies that develop sensitive technology, such as robotics and aerospace.

The development follows U.S. tariffs on Chinese goods as well as on European and Canadian aluminum and steel, along with the threat of retaliatory tariffs from Europe on U.S. products. U.S. President Donald Trump, who has promoted protectionist measures, is now mulling additional tariffs on European cars.

"The trade war keeps opening up on new fronts," Sal Guatieri, an economist at BMO Nesbitt Burns, said in a note.

Car manufacturer Daimler AG has warned that tariffs will lower its profits, illustrating the financial impact of the simmering conflict. As well, U.S. motorcycle maker Harley-Davidson said on Monday that it would move some production overseas to avoid European tariffs, potentially affecting U.S. jobs.

Economists at Deutsche Bank tallied the potential damage in a note released late last week. The financial hit from duties on US$250-billion worth of Chinese imports, US$50-billion of aluminum and steel imports and US$40-billion of European automobile imports could cost U.S. businesses and consumers an estimated US$50-billion - erasing some of the impact of recent U.S.

tax cuts and eroding economic growth forecasts.

"Our base case remains that cooler heads will prevail and that a more adverse trade war will ultimately be averted," the Deutsche Bank economists said in their note.

Investors aren't so sure. Among big U.S.

movers, Intel Corp. fell 3.4 per cent, Visa Inc. fell 3.2 per cent and Boeing Co. fell 2.2 per cent. Among some of the more notable declining stocks in Canada: Suncor Energy Inc. fell 3.5 per cent, National Bank of Canada fell 2.4 per cent and marijuana producer Canopy Growth Corp. fell 5 per cent.

Some indicators are reflecting a gloomy outlook for the stock market.

The Dow, a narrow gauge of 30 U.S.

stocks, has declined in nine of the past 10 trading days - a remarkably long losing streak that adds up to a 4.5-per-cent decline.

The Dow is now below its 200-day moving average, for the first time in two years, which some market technicians believe reflects limited technical support for stocks.

Also worrisome, the S&P 500 has dipped close to its 50-day moving average.

Even the bond market may be having an effect on investor appetite for stocks: The spread between the yield on two-year and 10-year U.S. Treasury bonds - or the yield curve - has contracted to its slimmest level since 2007.

Strategists at Merrill Lynch pointed out that a yield curve inversion (where twoyear bond yields are higher than 10-year bond yields) has preceded all seven of the past recessions, going back to 1970.

Associated Graphic

THE GLOBE AND MAIL, SOURCE: BLOOMBERG


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