U.S. equity markets were on an upward swing ahead of the weekend following a roller-coaster ride this past week, which began with a trade-inspired plunge in stocks.

Among some of the bumpier rides, Harley-Davidson (HOG) had fallen Monday by around 6% after the popular motorcycle maker said that given the tariffs imposed by the U.S. on EU metals, the company will incur costs of about US$2,200 per average motorcycle export.

HOG said in an SEC filing on Monday that it “believes the tremendous cost increase, if passed onto its dealers and retail customers, would have an immediate and lasting detrimental impact to its business in the region, reducing customer access to Harley-Davidson products and negatively impacting the sustainability of its dealers’ businesses.”

HOG added: “To address the substantial cost of this tariff burden long-term, Harley-Davidson will be implementing a plan to shift production of motorcycles for EU destinations from the U.S. to its international facilities to avoid the tariff burden.”

Some analysts pointed to HOG as an example of how the recent escalation of U.S. and global trade-related feuds have brought tensions closer to home.

According to Interactive Brokers chief options strategist Steve Sosnick, the news of HOG’s plan to shift some of its production offshore posed a “real psychological blow to the markets.” 

In a video produced for IBKR Traders’ Insight, Sosnick highlighted how the announcement Monday had affected market participants in a “startling” way, as the recent trade war rhetoric had turned from protecting U.S. jobs to costing U.S. jobs, especially at a very major “brand name, U.S., ‘made in America’ type of company.”

Meanwhile, the yield on the 10-year U.S. Treasury note was bid at around 2.85% intraday Friday, down around 26bps from its 52-week high set May 17.

Also, Personal Consumption Expenditures (PCE) accelerated to 2.3% year-over-year in May, which met or exceeded the Fed’s 2% target for three straight months – the first time in six years.

M&A

This past week ushered-in another U.S. mega-merger, as well as a heightened focus on Chinese interests in U.S. tech companies.

Among the firms making headlines, ConAgra (CAG) on Wednesday said it agreed to purchase Pinnacle Foods (PF) for an estimated US$10.9bn, including net debt, to shore up its frozen foods and snacks sections.

The announcement triggered a massive 7.4% fall in CAG’s stock at the market’s close to US$35.40, with PF also shedding close to 4.3% to end the day at US$64.95.

News of the tie-up placed CAG’s credit rating under pressure, with Moody’s Investors Service having launched a review that could result in a downgrade of its ‘Baa2’ rating on the company.

Moody's analyst Brian Weddington said the agency’s review will focus on the increased financial leverage that would result from the proposed transaction, which would likely lead to ratings cuts.

However, the dent in CAG’s perceived creditworthiness isn’t entirely surprising.

Published reports about a potential combination of the two packaged food firms had been circulating for more than a month prior to the announcement, and jitters about CAG’s ability to repay its credit obligations had spurred nearly 22.5bps of spread widening its 5-year CDS over the past three months.

Bad call

Some investors were likely more surprised by the equity market’s reaction to the announcement.

The sharp fall in CAG’s share price Wednesday, for example, came as grave news to the bullish option trader who appeared to have nailed events following a purchase on May 21 of 5,000 bullish call options expiring in September for a premium of around US$0.30 per contract.

Made in China

Meanwhile, the U.S. intensified its protectionist rhetoric with respect to industries sensitive to national security, triggering a sharp fall in Chinese stocks.

With China reportedly accelerating its financial support for its “Made in China 2025” strategy, where emerging new technologies such as the Internet of Things (IoT), smart appliances and high-end consumer electronics have surfaced to the forefront of the country’s innovative approach to manufacturing, the U.S. has become increasingly wary of Chinese interests in its domestic tech arena.

Kenneth DeWoskin, a senior advisor to Deloitte’s Chinese Services Group, noted that over the past decade, a wide variety of export controls have evolved, along with an expanding list of barriers to acquisition of some U.S. tech companies. “A more and more commodious view of national security issues related to technology” – propelled by concerns about economic growth and competitiveness, safety and diplomacy – “could lead to an increase of the scope and powers” of U.S. tech regulators, he added.

Indeed, the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) legislation aims to replace the Committee on Foreign Investment in the United States (CFIUS), amid criticisms that CFIUS has become outdated – in a manner that could inadvertently harm national security.

However, CFIUS has recently given recommendations to U.S. officials that have led to the demise of mega-mergers in the tech sector such as chipmaker Qualcomm’s (QCOM) US$117bn proposed tie-up with Singapore-headquartered semiconductor supplier Broadcom (AVGO).

Look Ahead

While the week ahead will be cut short on Wednesday by the celebration of the U.S. Independence Day holiday, the calendar will still be buzzing with a heavy slate of market-driving economic data.

The Institute for Supply Management will get the week started with a fresh reading on its manufacturing index, which had made a solid rebound in May. While the June number could fall back below May’s mark, the market generally thinks manufacturing has maintained sufficient momentum to keep it above April’s level.

Among other pieces of economic news, the week will also bring an update on vehicle sales and factory orders on Tuesday, weekly jobless claims and the EIA’s report on petroleum inventories out on Thursday, as well as new international trade data and the all-critical Bureau of Labor Statistics’ jobs report for June to finish up the week.

Analysts generally anticipate the jobs headline number will recede somewhat after nonfarm payrolls rose by 223k in May. The unemployment rate had also edged down to a near 50-year low of 3.8%, and average hourly earnings also rose more than expected.

Against this backdrop, the Federal Reserve decided at its June meeting to hike interest rates by another 25bps, lifting the fed funds rate to its highest level in nearly 10 years.

Investors may find more clues about the direction of monetary policy, when the Fed’s Open Market Committee releases its minutes for that meeting on Thursday.