Summer began as the market wrestled with trade concerns, and it looks like it might end the same way. Friday’s last summer trading session gets underway with trade front and center amid worries about U.S. commercial relations with China, Europe and Canada.

The S&P 500 (SPX) has had a bunch of four-day win streaks this year and on Thursday, another four-day run came to end. The first pressure came after a closely watched inflation gauge posted a six-year high (see more below), and then trade issues provided the closing blow. Overseas markets took a beating earlier Friday, and U.S. stocks looked like they might limp into the long weekend.

Tariff Fears Back in Play

Stocks retreated late Thursday after report from Bloomberg that President Trump is ready to slap tariffs on $200 billion in Chinese goods as soon as Tuesday, the day after Labor Day.

Industrials and materials took the brunt of the pressure from a sector standpoint as investors might be wary about multinational companies potentially suffering the most from new tariffs and any reciprocal ones China might impose on U.S. goods. Still, pretty much every sector sank in the late going Thursday, with the best performances seen in traditionally “defensive” areas like utilities and health care.

One thing to consider keeping in mind is that the Bloomberg article cited “sources,” not any official word from the White House, so nothing is in stone. However, it wouldn’t be too surprising to see new tariffs considering the threats made by the administration in the past. So far, the U.S. and China have levied tariffs on $50 billion each of the other country’s products. In addition, some analysts said the president’s interview later Thursday where he touched on trade issues with Europe and discussed the possibility of the U.S. leaving the World Trade Organization sounded bearish. Trade talks between the U.S. and Canada are scheduled to wrap up today, so investors might want to consider keeping an eye on that.

The steep losses after the news report reminded investors of what sometimes happens in thinly traded pre-holiday markets, especially ones where the indices recently hit all-time highs. Markets can get emotional and a little jittery at these levels, and that’s what might have led to a more dramatic sell-off than what might usually happen from one piece of bad news.

International Wobbles

However, the China tariff story wasn’t the only negative international news that helped snuff out the mid-week rally. Argentina’s peso dropped sharply as the government there raised interest rates to 60 percent in an emergency move a day after it asked the International Monetary Fund to speed up disbursement of a $50 billion loan. Coming just a few weeks after Turkey’s currency struggles, the news from south of the equator might have reminded investors that emerging markets continue to look shaky in some respects. The Argentine peso has lost half of its value this year.

Also, the benchmark German bund yield keeps sinking, falling to 0.34 percent Thursday from as high as 0.49 percent at the start of the month. A lower bund yield tends to speak toward economic fears. We’re getting close to the next European Central Bank (ECB) meeting in mid-September, and recently released minutes from the last one showed that officials believed the eurozone economy still needs “significant” stimulus. If that’s the case, it could mean an even wider gap developing between rising U.S. yields and fading European interest rates, although the ECB does plan to end its bond buying program by the end of the year.

The widening in the U.S./European rate gap could potentially help the U.S. dollar, possibly raising a headwind for some U.S. companies that depend heavily on exports. A rising dollar tends to make U.S. products more expensive to foreign buyers. Emerging markets have been struggling.

Dollar Stays Elevated

The dollar index was up just a bit at 94.72 late Thursday, down from recent one-year highs above 96 but well above the early 2018 lows below 90. Investors might consider keeping an eye on that number, because a strong dollar could have an impact on Q3 earnings for many U.S. companies, and some, though certainly not all, of the corporate guidance for Q3 already looks a bit soft.

That said, we’re coming off what many analysts believe is an outstanding U.S. earnings season with average earnings per share rising at a rate north of 24 percent. Many analysts project another 20 percent or better quarter for Q3, but earnings season is a long way off. In the meantime, trade fears like the ones that struck the market Thursday might continue to grab more of the spotlight after the holiday weekend.

In earnings news, there was more evidence of a healthy U.S. consumer late Thursday when Lululemon Atheletica Inc. LULU 15.28% reported 20 percent growth in same-store sales, a comparable figure that’s seldom seen. The company handily beat analysts’ estimates and raised full-year guidance. Shares rose 11 percent in pre-market trading.

Also, shares of American Outdoor Brands Corp. AOBC 34.44% rose more than 15 percent in post-market trading Thursday after the company beat Wall Street analysts’ estimates.

FIGURE 1: VIX Shoots Up: As stocks declined late Thursday, the VIX hit its highest level in about two weeks, above 13, as this one-month chart shows. Choppy markets ahead of a holiday weekend aren’t too surprising, and come as the U.S. dollar index (purple line) continues to trade below recent highs. The dollar’s relative weakness compared to earlier this month might partially reflect recent Treasury note yield struggles and what some analysts saw as “dovish” Fed language last week. Data Source: Cboe, ICE. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Breaking the Rule

One of the old “rules” of the market is being defied right under our noses this summer. Longstanding market wisdom says that it’s hard to have a big rally without financial sector participation. Yet here the market sits near record highs even as the financial sector sputters, trailing the broader market by a huge margin so far this year. Through Wednesday, the S&P 500 (SPX) was up about 9 percent year-to-date, but financials were up just 2 percent. For a while earlier this year, financials closely tracked the SPX. But starting in May, they began losing ground and haven’t recovered.

This isn’t one of those times when one sub-sector of financials drags while others move higher. Instead, both the big banks and the smaller regional banks are suffering together, at least over the last month. Both sub-sectors have been pretty flat even as the SPX put in new all-time highs. Analysts offer a number of possible reasons for the financial sector’s struggles, including relatively flat interest rates and a sputtering housing market that may be reducing demand for mortgages.

Tick…Tick…Tick

As for the inflation picture, it keeps ticking higher. The latest word came Thursday morning with July Personal Consumption Expenditures (PCE) prices, which rose 2.3 percent year-over-year for the overall number and 2 percent for the core reading that strips out volatile food and energy numbers. Both headline and core were slightly up from the previous month, and now are both at or above the Fed’s target 2 percent inflation goal. As Briefing.com noted after the report, there’s little here that would argue against the Fed staying on its rate hike path at next month’s meeting. Another takeaway: Personal spending rose 0.4 percent in July, perhaps another sign that investors might expect a solid gross domestic product (GDP) reading for Q3. By the way, that 2.3 percent jump in PCE prices was the highest since March 2012. It could be interesting to see if the August jobs report next week shows wages rising more quickly, because that might lead to speculation that higher wages are starting to translate into higher prices.

Beyond the Sugary Fizz

In M&A news, The Coca-Cola Co. KO 0.22% agreed to acquire British retail coffee chain Costa Coffee in a deal valued at $5.1 billion. This comes on the heels of last week’s announcement by PepsiCo, Inc. PEP 0.19% that it agreed to a $3.2 billion acquisition of SodaStream, maker of those home water-carbonation devices. In announcing the Costa deal, KO CEO James Quincey described the hot beverage market as one in which the company “does not have a global brand.” Costa is global; its 3,800 stores are located in 32 countries, according to Bloomberg.

Both firms have acknowledged that sugar-sweetened carbonated beverages—once the core of KO’s and PEP’s product lines—have been trending downward in recent years. These acquisitions seem to be merely the latest chapter in the firms’ attempts to move beyond their legacy offerings.