Markets Rebound, Following Reports Fed May Try 'Wait-and-See' Policy

December 6, 2018

By Kristen Lee and Chloe Aiello

The markets rebounded from session lows after news broke the Federal Reserve is considering a new approach to interest rates that could translate to fewer rate hikes in the coming year.

The Wall Street Journal reported on Thursday the Fed is considering a "wait-and-see" approach to monetary policy, after the anticipated December hike that is by and large already priced into the markets.

The news follows comments Fed chair Jerome Powell made in late November about interest rates remaining "just below the broad range of estimates of the level that would be neutral for the economy ー that is, neither speeding up nor slowing down growth."

Investors and the markets widely interpreted this to mean that Powell was softening his tone on monetary policy.

The Dow Jones Industrial Average closed down just 79 points, or 0.3 percent, after briefly plunging more than 700 points. The S&P closed down 0.15 percent and the Nasdaq turned positive by market close, finishing the session up 0.4 percent.

News that a top executive at Chinese tech giant Huawei has been arrested on U.S. orders touched off a global market decline on Thursday morning on fears of escalating U.S. tensions with China.

The arrest of Huawei CFO Meng Wanzhou, who is also the daughter of the company's founder, is believed to be related to the company's violation of U.S. sanctions of Iran. Those charges, however, were not confirmed.

In a statement, Huawei confirmed that Meng was detained by Canadian authorities on behalf of the U.S. as she was transferring flights in the country. It said the U.S. "seeks the extradition of Ms. Meng Wanzhou to face unspecified charges in the Eastern District of New York" and has provided the company with "very little information regarding the charges." Huawei also said it "is not aware of any wrongdoing by Ms. Meng."

"The company believes the Canadian and US legal systems will ultimately reach a just conclusion," the statement continued. "Huawei complies with all applicable laws and regulations where it operates, including applicable export control and sanction laws and regulations of the UN, US and EU."

Chinese foreign ministry spokesman Geng Shuang on Thursday demanded the “immediate release” of the Meng during a press conference, arguing the detention violates her human rights.

"Detaining the person involved with no explicit reason certainly harms her human rights," Geng said, adding that "the Chinese side has made clear its stern position to the Canadian side and the US side respectively on this case."

Following news of the arrest, U.S. stock futures plunged lower on increased volume, shortly after open at 6 p.m. ET on Wednesday. The CME Group intervened by pausing trading in multiple 10-second intervals overnight to prevent a greater decline, CNBC reported.

Thursday's volatility followed further sharp declines Tuesday on uncertainty around U.S. trade negotiations with China, worries that a flattening yield curve is signaling an approaching economic downturn, and concerns over oil oversupply. Markets were closed Wednesday for a national day of mourning for the late President George H.W. Bush.

President Trump and China's Xi Jinping struck an agreement on Saturday ー the same day as the arrest ーthat guarantees a tariff ceasefire for the next 90 days. The agreement is meant to allow for more time for trade negotiations, and markets initially edged up on some positive headlines. But as days passed without more concrete action, worries increased that 90 days simply isn't long enough to resolve tensions and reach a positive agreement.

"If trade worsens, especially with China, I think one could argue it is a material headwind for the economy, it is a material headwind for corporate earnings growth," Jason Ware, chief investment officer at Albion Financial, told Cheddar on Tuesday. "So as far as trade being an actual risk and a headwind to those fundamentals, it's an important one."

Trump did not immediately respond to the news of Meng's arrest, but since the timing coordinated so closely, some have suspected Trump is using the arrest to bargain for better trade terms with China.

But Professor Julian Ku, a Maurice A. Deane Distinguished Professor of Law at Hofstra University, told Cheddar that it isn't normal practice for the Justice Department to coordinate these matters with the White House.

"I'm sure the White House knew they were pursuing Huawei ... and they probably knew they were looking at an individual criminal indictment. The timing wouldn't normally be coordinated with the White House," Ku said. "If anything the White House probably would have asked them to delay, because it's kind of embarrassing to do it during the talks," he added.

Some fear the Justice Department's actions will prompt retaliation from China, since Huawei is one of the Chinese government's "pet" companies. Ex-commerce department official James Lewis told Axios that Huawei "will retaliate and China will take hostages."

"If I was an American tech executive, I wouldn't travel to China this week," Lewis added.