ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Sue Herera and Bill Griffeth.
BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: Stocks plunge. China strikes back with retaliatory tariffs, wiping out about $1 trillion in market value worldwide.
SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Caught in the middle. A small New Jersey manufacturer is pulling back on growth plans as it tallies the cost of tariffs on its business.
Price fixing accusations. A sweeping lawsuit claims generic drug companies conspired to inflate prices and their stocks fall sharply.
Those stories and much more tonight on NIGHTLY BUSINESS REPORT for Monday, May the 13th.
HERERA: Good evening, everyone. And welcome.
What a way to start the week, stocks fell sharply at the open and stayed there, as tensions flared when China slapped new tariffs on U.S. goods. The fear is that a heightened and prolonged trade fight between the world`s two largest economies could hurt global growth and could have a very broad impact.
So, let`s get right to the closing numbers. The Dow Jones Industrial Average dropped 617 points to 25,327. The Nasdaq was lower by 265 points. And the S&P 500 fell 69.
Kayla Tausche starts us off tonight with the latest developments on the U.S./China trade war.
KAYLA TAUSCHE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Both the U.S. and China are arming themselves with new weapons as the trade war drags on. China says it will slap new tariffs on $60 billion in U.S. goods from light bulbs to peanuts to beef. As the U.S. targets the remaining $300 billion in goods China sends to the U.S. each year that has so far been spared.
President Trump says he hasn`t decided yet whether to launch those tariffs.
DONALD TRUMP, PRESIDENT OF THE UNITED STATES: We have another $325 billion that we can do if we decide to do it.
TAUSCHE: As tensions heat up, there`s room for some goodwill. China`s new tariffs don`t take effect for three weeks. President Trump is now pointing to the G-20 meeting at the end of June in Japan where he`ll meet China`s President Xi.
TRUMP: Maybe something will happen, we`re going to be meeting, as you know, at the G-20 in Japan. That will be I think probably a very fruitful meeting.
TAUSCHE: The next several weeks will be critical, with the treasury secretary saying he plans to keep talks open.
REPORTER: When will you go to Beijing?
STEVEN MNUCHIN, TREASURY SECRETARY: We`re working on dates, nothing confirmed yet.
TAUSCHE: China may be sharpening other tools too. State paper “The Global Times” says it could stop purchasing farm and energy products, cut back on orders of Boeing (NYSE:BA) planes and possibly dump treasuries.
Mnuchin dismissed that idea.
REPORTER: Will China continue to buy our debt?
MNUCHIN: I assume so. It`s a great investment.
TAUSCHE: Despite the volatile market reaction to the tit for tat, President Trump says he loves the position the U.S. and its economy are in. And negotiators continue to say he`ll walk away if any deal doesn`t produce permanent change.
For NIGHTLY BUSINESS REPORT, I`m Kayla Tausche in Washington.
GRIFFETH: And as Sue mentioned, the trade tensions resulted in some very strong selling on Wall Street today. Bob Pisani takes a look at the market`s ugly mood.
BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Trade tensions flared up today, putting serious pressure on stocks. The Dow is plummeting more than 700 points at its low, but closing well off of that. Stocks were down overnight, but they turned even lower prior to the open when China announced it will raise tariffs on $60 billion of U.S. imports beginning June 1st. But these new higher tariffs will largely hit farmers and affect thousands of products. Apple (NASDAQ:AAPL), Boeing (NYSE:BA), Caterpillar (NYSE:CAT), led the Dow lower here, all three are down about 20 percent or more from their recent highs.
Stocks did come off their lows late in the day on a few comments from both U.S. treasury secretary Steve Mnuchin and President Donald Trump saying trade talks were still on going, that`s not much of the market to go on. Why is this?
Because the trade wars have suddenly become very real. We not only have higher tariffs on existing goods, we have a very specific China response targeting U.S. agriculture products, with possible other measures to come.
That`s taken a tool at commodity prices. So, for example, soybean futures, they plummeted to their lowest levels in more than a decade. And cotton prices are also coming under pressure. We`ve had talk of the U.S. expanding tariffs to all China imports which would particularly target the technology field. One reason Apple`s down 5 percent today.
But for many, the damage is already done. Retailers are getting hit because their input costs are about to rise. So, names like Macy`s (NYSE:M), Gap (NYSE:GPS), Nordstrom (NYSE:JWN), Lbrands, they all closed at new 52-week lows today.
For NIGHTLY BUSINESS REPORT, I`m Bob Pisani at the New York Stock Exchange.
HERERA: More now on Boeing (NYSE:BA) and the bond market, both of which Kayla mentioned in her report. The editor of the Chinese newspaper “The Global Times” tweeted: China may stop purchasing U.S. agricultural products and energy, reduce Boeing (NYSE:BA) orders and restrict the U.S. service trade with China. Many Chinese scholars are discussing the possibility of dumping U.S. treasuries and how to do it specifically.
A Boeing (NYSE:BA) spokesperson says that the company is confident the U.S. and China will continue trade discussions and come to an agreement that burn fits both U.S. and Chinese manufacturers and consumers. Nonetheless, the stock fell more than 4 1/2 percent.
GRIFFETH: And what about that line in the Chinese editor`s tweet about China selling U.S. treasuries? Now, China is the biggest buyer of our debt. What would happen to interest rates and our economy if it started selling those treasuries?
Joining us tonight, Bill Adams is senior economist with PNC Financial Services Group.
Bill, thanks for joining us tonight.
WILLIAM ADAMS, PNC FINANCIAL SERVICES GROUP SENIOR ECONOMIST: Thanks for having me, Bill.
GRIFFETH: It`s considered highly unlikely they would think about selling too many of their treasuries. But what do you think — isn`t it interesting they even brought it up in this street? What do you think would happen if they did start thinking about selling in size?
ADAMS: I think if we did see a large sale of treasuries by China`s central bank, we would see treasury bonds fall, yields move higher over a short period of time. But I think after that, it`s likely that the Federal Reserve would intervene in the treasury market and buy treasuries. That`s what the whole point of quantitative easing was. If they saw yields moving in a direction that was out of line with their goals for the U.S. economy, I think the fed has the tools to bring interest rates back where they want them.
HERERA: Art Cashin, down on the floor of the New York Stock Exchange with UBS, suggested that perhaps a worst case scenario would be if China just stayed out of the auction and didn`t buy any more U.S. treasuries. What do you make of that scenario?
ADAMS: I actually — I think China has already stepped back quite a bit from financing the U.S. government. Chinese foreign exchange reserves, peeked at around $4 trillion U.S. dollars a few years ago. And now, they`re down to around $3 trillion U.S. dollars.
So, China has already changed from being a net buyer to a net seller over a multiyear time horizon. And the ten-year government bond yield is only 2.4 percent right now, and the U.S. economy continues to grow.
GRIFFETH: But again, we don`t want to panic anybody, there is highly unlikely the Chinese would sell too many of their treasuries, why is that? Let`s explain that.
ADAMS: China owns treasuries, not because they like the U.S. government or they want to finance it, but because it`s an insurance policy against a shock to the Chinese financial system. Treasuries are a risk free asset in the United States. And the U.S. dollar is the world`s reserve currency.
So, having treasuries is a buffer against bad things happening outside of China and affecting the Chinese financial system. With this conflict between the United States and China and down side risk to global growth, all the more reason China doesn`t want to tear up its insurance policy today.
GRIFFETH: Bill Adams with PNC Financial Services Group, again, thanks for joining us tonight, Bill.
ADAMS: Thanks for having me.
HERERA: The tariffs already in place have not been kind to a manufacturer in New Jersey. Contessa Brewer took a trip to Piscataway to measure the impact on the business firsthand.
CONTESSA BREWER, NIGHTLY BUSINESS REPORT CORRESPONDENT: A long line of products facing a long list of tariffs. Strato designs and manufactures equipment for the railroad and transportation industry, but the tariffs are derailing plans for growth.
Many of the finished parts are made in China and sent to the U.S. They were just slapped with a tariff increase now totaling 25 percent. It will cost this small company in central New Jersey $14 million over 15 months.
And buying all American isn`t an option.
SUSAN DIEHL, STRATO COO: The problem is, we can only — the industry is only supplying about 30 percent of the products necessary for the industry domestically.
BREWER: These parts will equip San Francisco`s public transit system known as BART. It will pick up the additional costs of the tariffs, which means taxpayers and riders are footing the bill. Strato is hiking prices as much as 10 percent and passing that along with railroad customers.
DIEHL: It forces the railroads to do, is pass the cost on to the shippers. The shippers have to pass the cost on to the consumer, and that`s every one of us.
BREWER: Like thousands of other American businesses, Strato is searching for ways to cut costs as it absorbs the rest of the tariff impact. Its workforce has declined 10 percent. And employees here are worried because their bonuses depend on the company`s growth. And Strato has significantly slowed its expansion.
DIEHL: We`ve invested about $30 million in the last five years in new product development. We are pulling that way back at this point in time. And it`s just — it`s slowing the development for the industry.
And the economy is going in the right direction. It`s growing. The rail system needs to grow with it.
BREWER: Those stuck in the middle of a global trade war are just hoping something will spark a change.
In Piscataway New Jersey, Contessa Brewer, NIGHTLY BUSINESS REPORT.
GRIFFETH: As you can imagine, the Federal Reserve is watching how this tariff spat plays out and how it may affect the economy. And right now, market expectations for a rate cut are changing.
Steve Liesman has more.
STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: In the wake of new tariffs for President Trump on Chinese goods and Chinese retaliation on U.S. goods, markets are now pricing in a quarter point cut from the Federal Reserve by October, and maybe as soon as September.
The probabilities in the Fed fund markets now price a 50 percent chance of a cut by September, 60 percent by October, 75 by December, and 90 percent by January 2020.
But for one Fed official, it`s too soon to make that call.
NEEL KASHKARI, MINNEAPOLIS FED PRESIDENT: I`m hopeful that cooler heads will prevail and this won`t go down a very nasty path. Obviously, it`s the worst case scenario, and its ever increasing tariffs for an extended period of time. That could change things. That could have a real effect on U.S. GDP growth. But right now, I`m not seeing it. So, I`m for one, in a wait- and-see mode.
LIESMAN: Gauging the economic impacts of tariffs are hard enough. The Federal Reserve also has to weigh the probabilities on the outcome of negotiations, whether or not there`s a deal, how long tariffs could be in place, how equity markets respond in the impact of lower stock prices, and the effect of all this on business confidence and capitol spending.
The J.P. Morgan writes that the trade war could hold global capital spending growth to zero this year and dampen Chinese GDP by 0.8 percent. The escalation of the conflict could also amplify an easing bias that is rate cuts across the globe.
All of this leads Morgan Stanley (NYSE:MS) to forecast serious easing by the Federal Reserve of interest rates. If the trade battle lasts three to four months, Morgan economists see more Chinese stimulus and 50 basis points or half a percentage point of cuts from the Fed.
For NIGHTLY BUSINESS REPORT, I`m Steve Liesman.
HERERA: So, with Fed expectations changing and the market selling off, is now the time to get defensive?
Joining us is Jack Ablin, founder, partner and chief investment officer at Cresset Capital.
Welcome back, Jack. Nice to see you.
JACK ABLIN, FOUNDER, PARTNER & CHIEF INVESTMENT OFFICER, CRESSET CAPITAL: Nice to see you, Sue.
HERERA: There are some expectations that this will be a long fight. And others say maybe a little bit on the shorter side. You say stay put for now as an individual investor, why is that?
ABLIN: Yes, I`m not ready to pull my hair out quite yet, Sue.
I think there are three stages of down drafts. There`s a technical one which we`re currently in. Then there`s one, what I would call cyclical which starts impairing the global economy. And then there`s systemic, one we had to endure back in the financial crisis.
The good news here is, we can take systemic downturn off the table. So, now, the question is, are we in a technical downdraft, which perhaps there`s a 10 percent downside risk to or something more cyclical, where now these tariffs start to impact economic growth globally and that the down draft could be, you know, a little more severe?
You know, there`s no evidence yet that this war is going to just continue on to start impairing economic growth.
ABLIN: And so, for my perspective, I`d say, we`re still in that technical phase and probably worth just standing pat for now.
GRIFFETH: So, you`d stand pat. But would you buy with some of the declines we`ve seen in the last two weeks?
ABLIN: Yes, I mean, for those investors who are sitting on the sidelines, it`s a couple of easier ways to get into the market would be those parts of the market that are somewhat insulated from the vagaries of these kinds of tariffs, and that would be U.S. small caps. They would tend to do better as these tariffs escalate, because they tend to do most of their business here domestically. Certainly, a focus more on services rather than goods could also be another way to play it.
Another would be REITs. REITs are generally considered U.S. based. Pretty much just real estate. Now, they are expensive. But they have done pretty well as a defensive play in this kind of environment.
And then lastly, master limited partnerships, MLPs, again, domestically focused income oriented, and they are cheap. But keep in mind, they are tethered to the global crude market. And so, if we do see a selloff in crude, they`ll likely go along with it. But again, they`re cheap enough that there`s a push in there and a decent yield.
HERERA: Jack, thank you so much. Jack Ablin with Cresset Capital.
Still ahead, 44 states, a handful of drug companies and one sweeping lawsuit.
GRIFFETH: Back to Boeing (NYSE:BA). That company is not only dealing with China right now, but also the fallout from those two deadly 737 MAX crashes. One of the planes that went down belonged to Ethiopian Airlines.
And tonight in an NBC News exclusive, the CEO of that airline says that he`s not sure what the future holds for his company and for the airplane maker.
(BEGIN VIDEO CLIP)
TEWOLDE GEBREMARIAM, ETHIOPIAN AIRLINES CEO: I cannot fully that the airplane would fly back on Ethiopian Airlines. It may if we are fully convinced and if we are able to convince our pilots, if we are ever to convince our traveling public, because, you know, all our headlines have grounded the airplane. But in our case, beyond grounding the airplane, we have this tragic accident just a couple months ago. So, it takes a lot of efforts to convince everybody that the airplane is safe. But beyond that, I think we have to convince ourselves, and we want to do that.
(END VIDEO CLIP)
GRIFFETH: He added that if his airline does fly those jets again, they`ll be the last to do so.
HERERA: Apple (NASDAQ:AAPL) already under pressure from a trade war with China got more bad news today. The Supreme Court will allow an antitrust class action lawsuit to move forward after a group of iPhone owners accused Apple`s app store of being a monopoly. The opinion says consumers have the right to sue the company, it does not accuse Apple (NASDAQ:AAPL) of violating the law. The stock fell nearly 6 percent in today`s session.
GRIFFETH: And it was a tough day in the marketplace for some drug makers. Forty-four states have now filed a massive lawsuit accusing a number of pharmaceutical companies of conspiring to inflate generic drug prices. Teva was hit the hardest among that group, down almost 15 percent today. Mylan (NASDAQ:MYL) and Pfizer (NYSE:PFE) were also named in that lawsuit.
Meg Tirrell has the details.
MEG TIRRELL, NIGHTLY BUSINESS REPORT CORRESPONDENT: The generic drug industry exists to make medicines less expensive. After patent protection expires on branded drugs, generic drug makers compete to bring cheaper copies to market. At least that`s how it`s supposed to work. A new lawsuit for more than 40 states alleges generic drug makers instead conspired to drive prices up, sometimes as much as 1,000 percent.
Connecticut Attorney General William Tong detailed the allegations in an interview with “60 Minutes”.
WILLIAM TONG, CONNECTICUT ATTORNEY GENERAL: I think what we`ve come upon is that the generic drug industry is the largest private sector corporate cartel in history.
TIRRELL: The news drove stocks of generic drug makers down sharply Monday. The suit is a broader version of one filed in 2016 involving 15 generic drugs. It alleges that 20 generic drug manufactures including Teva, Mylan (NASDAQ:MYL), Novartis` Sandoz, a Pfizer (NYSE:PFE) unit, and others, quote: embarked on one of the most egregious and damaging price-fixing conspiracies in the history of the United States.
The number of drugs, more than 100. The cost to consumers, the lawsuit claims, billions of dollars.
TONG: It`s devastating. It affects health insurance premiums and health insurance plans, it impacts Medicare and Medicaid. And it is a chain reaction that drives up the price of American health care to a natural heist.
TIRRELL: The drug companies denied the allegations, and the generic drug trade group, the association for accessible medicines, further points out that generic drug prices have declined over the last three years, the lawsuit mainly focuses on activity from 2013 to 2015. But it`s clearly spooked Wall Street.
DAVID MARIS, WELLS FARGO SECURITIES: Depending on what it could be, this could be problematic or really problematic.
TIRRELL: The lawsuit seeks damages of penalties and return of profits from the alleged price fixing. And the states say the investigation is ongoing.
For NIGHTLY BUSINESS REPORT, I`m Meg Tirrell.
HERERA: Tariffs are another thing that Ford and GM have to worry about in China. And that`s where we begin tonight`s “Market Focus”.
Auto sales in China fell for the 10th straight month in April, falling nearly 15 percent, from the same month a year ago. Ford`s China`s car sales fell 37 percent last year, while GM slipped 10 percent. Today, GM fell 3-1/2 percent to $36.58. Ford was off 3 percent to $10.08.
The CEO of Bed, Bath and Beyond is stepping down from the company effective immediately. This comes as activists investors are pushing for changes at the retailer after sluggish sales. The CEO is also resigning from the board. Shares of Bed, Bath were down more than 4 percent to $15.08.
GRIFFETH: Nielsen is reportedly pulling out all the stops to keep its last remaining bidder, Advent International, at the bargaining table by lowering its asking price. “The New York Post” says the offer could be as much as $20 billion. And the ratings company agreed to push back the deadline to June after Advent needed more time to conduct its due diligence on this. Nielsen shares fell about 3-1/2 percent today to $23.75.
And following a disappointing debut on Friday, Uber shares continue to decline today. Some investors are questioning if the ride-sharing company may take the same path as rival Lyft whose shares are down by nearly a third since it became public a few months ago. Today, Uber shed nearly 11 percent to $37.10.
HERERA: It is Infrastructure Week. Events are being held across the country with the focus on rebuilding and modernizing portions of America`s infrastructure. Tonight, we take a look at the drive to be less reliant on the electrical grid. Home builders are leading the charge, using the latest technology to build large developments that use no energy at all.
Diana Olick is in Irvine, California.
DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: From the outside, these look like your basic California condos, 44 units. But inside, they`re actually zero. Net zero, meaning they produce as much energy as they use.
STEVEN HILTON, MERITAGE CEO: The multifamily is more challenging, because you don`t have as much space for, you know, solar collectors. It`s a tighter site. The land is more constrained, so it`s a lot more complicated to execute.
OLICK: Meritage (NYSE:MTH) is the first large scale production builder to move into multifamily net zero with this complex in Irvine. It`s all electric, using energy efficient lighting, appliances and HVAC and heat pump water heaters. It`s built using spray foam insulation, not just in the attics, but in the walls, making the interior much tighter, so heating and cooling are more efficient.
On the roof, high efficiency solar panels. The development is using new rules from the state`s public utility commission that allow output from a community solar system to be distributed to individual homeowners throughout the complex.
Even sunny California isn`t sunny every day. So, when the sun is shining, the solar system produces more energy than is needed and that energy is sold back to the utility company and the homeowner gets a credit. So, on dark rainy days, they use that credit and the bill comes out to net zero.
HILTON: And f you have no utility bills, that`s going to allow you to buy more house, and people are excited about that.
OLICK: High demand for housing like this will in turn reduce the demand on electricity for the nation`s electric grid and infrastructure.
ANDREW MCALLISTER, CA (NASDAQ:CA) ENERGY COMMISSIONER: So, it`s not just about distributed solar. It`s about our buildings being responsive. So utilizing renewable energy when it`s available in our buildings, and not utilizing grid energy when it`s not very low carbon.
OLICK: The condos are slightly more expensive up front. But the utility savings pay that back in seven years of ownership, to pay back to the electrical infrastructure and to the planet is priceless.
For NIGHTLY BUSINESS REPORT, I`m Diana Olick in Irvine, California.
GRIFFETH: And coming up, why global trade tensions are putting the multibillion dollar art market to the test.
HERERA: It is springtime in the art auction market. But this year, rising tensions between the U.S. and China could dampen one of the most lucrative seasons for that industry.
Robert Frank explains.
ROBERT FRANK, NIGHTLY BUSINESS REPORT CORRESPONDENT: It is the biggest test of the year for the global art market. More than 2,000 pieces totaling between $1.5 billion and $2 billion set to be auctioned off by Sotheby`s, Christie`s and Phillips this week.
The big question: will the trade war, market swings and China slowdown scare away the big bidders. Chinese buyers accounted for 29 percent of all global auction sales.
Of the top 20 lots sold at Sotheby`s last year, six went to Asian buyers, so China is critical for the growth of the art market. But all collectors will be keeping a close eye on the stock market as well.
TAD SMITH, SOTHEBY`S CEO: The biggest risk to the art market is the same risk to the equity markets. It`s the same risk to the other things. It`s black swans, challenges on macro or political level. There`s not anything more focused on art than anything else for an equity or bond holder.
FRANK: Many of the top trophies this week came from estate sales. The estate of S.I. Newhouse, the former chief of Conde Nast, is selling the most expensive piece Jeff Koons` rabbit sculpture. It is considered Koons` masterpiece. He only made four. This is the last in private hands.
It`s expected to sell for $50 million to $70 million at Christie`s, even though it remains highly controversial.
ALEX ROTTER, CHRISTIE`S CHAIRMAN, POST-WAR & CONTEMPORARY ART: That was such a shocker when Jeff first exhibited in 1986. People were thinking he`s out of his mind. People called it outer-worldly, alien, awful, everything. So, it was a really radical sculpture.
FRANK: Christie`s also selling this piece by Robert Rauschenberg titled Buffalo II. It comes from the state of Beatrice Mayer, one of the heiresses to the Sara Lee (NYSE:SLE) fortune. And it`s expected to sell from between $50 million and $70 million.
And Sotheby`s will sell one of Monet`s famous grainstack paintings for over $55 million.
And if you`re in the market for a Koons animal sculpture but don`t have $70 million to spare, you can pick up his elephant at Sotheby`s for a mere $2 million to $3 million.
For NIGHTLY BUSINESS REPORT, I`m Robert Frank at Christie`s in Manhattan.
GRIFFETH: And before we go, a final look at the day on Wall Street. Big selloff to start the week with the Dow down 617 points, Nasdaq was lower by 269, the S&P 500 down 69 points today.
HERERA: What a day.
HERERA: That does it for NIGHTLY BUSINESS REPORT tonight. I`m Sue Herera. Thanks for joining us.
GRIFFETH: I`m Bill Griffeth. Have a great evening. We`ll see you tomorrow.
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