It all starts with a currency move made in China.
The S&P 500 fell 1.3% in premarket trading after the Yuan fell to its lowest level against the dollar in 10 years. Meanwhile, the 10 year treasury fell to 1.76%, after having hovered at a tick above 2% for the past few weeks.
Why Stocks Fell
The devaluation of the Yuan, likely engineered by China itself, indicates the U.S. and China aren't exactly getting closer to a trade resolution. A weaker yuan makes Chinese exports more attractive because buyers of Chinese goods must buy the Yuan before buying the good. On a strictly fundamental basis, this is good for economic growth and equities because it's good for the Chinese economy.
But it signals China would rather handle Trump's threat of 10% additional tariffs on Chinese goods with a protectionist measure, rather than conciliatory negotiating tactics, which were never in play for China anyway. The market is currently looking for some reasons to be optimistic on trade, and it isn't finding that reason.
The developments pushed the 10-year treasury down, as investors rushed into the safe asset on fears of slowing global growth, fears that were prompted Monday by the trade outlook.
With the treasury market pricing in more rate cuts, which the trade war may necessitate, one may think stocks would move higher. Stock investors had already bid up stocks on hopes of several 2019 rate cuts. Now, as the trade outlook -- and therefore the growth outlook -- dims, stocks are falling and the move into treasuries is mainly about the need for safety.
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