Pinpointing the exact cause of market volatility—and by extension, a market correction—is often a difficult, sometimes futile exercise.
Growing Possibility of a Trade War
A full-on global trade war would be a material negative, and could be a bear market catalyst if it escalates too far. But so far, I think the market volatility is tied more to the uncertainty of trade policy than the actual tariffs themselves.
To date, the only implemented tariffs are the 25% steel and 10% aluminum duties, but within a matter of a few days five of our largest trading partners were exempted. China implemented tariffs on $3 billion worth of U.S. goods, but that only amounts to a ~25% tariff on 0.00136% of total U.S. exports and 0.00015% of U.S. GDP. In other words, nothing meaningful has been imposed to date. All the “$50 billion” and “$100 billion” tariff talk you’ve heard are just threats, not actual tariffs.
Regulating the Technology Sector
Mark Zuckerberg of Facebook testified before Congress last week, as the company is under intense public scrutiny for its mishandling of user data. President Trump’s targeted tweets at Amazon also appeared to ratchet up pressure on the sector.
Heavy-handed regulation would be a negative for tech, but it appears that the most we might expect from Congress is some narrow legislation that applies to user data and privacy – not legislation on the digital advertising business where the revenues are. What’s more, many technology companies in the sector seem to be nowhere near where Congress has its crosshairs.
These companies sell software, hardware, cloud services, and so on. In my view, there’s about a 0% chance any legislation would be broad enough to affect the entire sector.
Tightening Financial Conditions
The Federal Reserve is actively shrinking its balance sheet and interest rates are gradually on the rise. The U.S. Libor OIS spread, which serves as a measure of short-term credit conditions, has just about doubled in the past couple of months – signaling tighter financial conditions.
Meanwhile, the yield curve continues to flatten, which squeezes bank net interest margins. In my view, more so than trade or tech regulation, this factor has been putting pressure on the market and should be watched most closely.
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