Why trade worries could hit markets

Commuters walk through a Wall Street subway station near the New York Stock Exchange.
Michael Nagle | Bloomberg | Getty Images

For U.S. stocks stuck in a holding pattern ahead of Friday's jobs data, a report on trade due Tuesday will give markets something to chew on.

"Does the trade data cause the president to tweet about trade? That would get it into the market's consciousness again," said John Canally, chief economic strategist at LPL Financial.

The worry has been that President Donald Trump's calls for tariffs and renegotiation of major trade agreements would prompt a trade war that would slow global growth.

January figures on the U.S. trade balance in goods and services are scheduled for release Tuesday morning. The deficit is expected to expand to $47.3 billion to start the year, according to the consensus of economists polled by Reuters. The deficit was $44.3 billion in December.

LPL's Canally is particularly focused on any changes in the services sector surplus, which was $21.4 billion in December. Travel is a component of services trade, and the U.S. Travel Association said last week the Trump's administration policies are hurting tourism.

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Trump on Monday signed a new executive order that blocks travel to the U.S. for 90 days from Sudan, Syria, Iran, Libya, Somalia and Yemen — countries the president says pose high risk of terrorism. The order takes effect March 16.

U.S. stocks closed slightly lower Monday, with financial and materials stocks the worst performers in the S&P 500. The index closed 7.8 points lower at 2,375.3 with only the energy sector gaining. All three major indexes ended about 1 percent below their all-time highs hit last week.

"What we're seeing is the global economy has stabilized and sometimes improving and that should be positive for stocks," said Peter Donisanu, investment strategy analyst at Wells Fargo Investment Institute.

"One of the key risks top of mind for anyone right now is U.S. trade policy," he said.

On the trade front, analysts are also keeping an eye Chinese foreign exchange reserves, scheduled for release overnight. The holdings fell below the psychologically key $3 trillion level in January and are watched for indications on the pace of money leaving China and how much Beijing is trying to prevent sharp weakness in the yuan.

"Overall, capital outflows so far in 2017 have turned out to be much better than expected, thanks to tightened capital controls and a weaker US $," Larry Hu of Macquarie said in a March 1 note. He expects foreign exchange reserves to drop $30 billion in February to $2.97 trillion.

Chinese trade data is due for release Wednesday Beijing time. The U.S. reported a $27.8 billion deficit in goods trade with China in December, for a total $347 billion in 2016.

Trump had promised to label the country a currency manipulator and threatened a tariff on goods imported from China, but so far has not taken such action.

Peter Navarro, head of the National Trade Council and author of the book "Death by China," wrote in an op-ed in The Wall Street Journal on Sunday that the U.S. trade deficit needs to be brought back into balance for economic and national security reasons. That includes limiting foreign investment in the U.S., he said. China is a major source of such investment.

"The thing that's missing from everything is details. It's very important to understand until you have an actual policy that's put in place," said Rob Lutts, president and CIO at Cabot Wealth Management.

Trump "has already in his two months here, I think, created a different mindset of a business leaders where they are thinking more build and invest here," Lutts said.

Trade matters aside, the key focus for markets this week is Friday, when the monthly employment report is scheduled for release.The report should affirm the case for the Federal Reserve to raise interest rates next week.

Treasury yields were little changed on the day. The was last near 1.31 percent, while the 10-year yield was around 2.50 percent.

On Tuesday, the Treasury is set to auction $23 billion in three-year notes. Consumer credit for January is also scheduled for release.

Earnings due before the bell Tuesday include Brown-Forman, Dick's Sporting Goods, Michaels and Momo. H&R Block, Red Rock Resorts, Bojangles and Urban Outfitters are scheduled to report after the close.

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