Published by Taylor Financial Group
October was a rough month in the market, with a sell off of close to 10% despite generally positive earnings pronouncements and a generally very health economy. What gives? The trade war skirmish between the World’s two largest economies (US and China) presents enough potentially real economic damage and headline risk that the market has actually been held back all year and began showing additional stress in October. In addition, international and emerging markets, which were due for a real comeback this year, have also struggled mightily under this Damoclean Sword.
What is the Tariff Talk
The U.S. has levied tariffs of 25% on steel and 10% on aluminum products, starting June 1st. Since then, the U.S has added another 25% of tariffs on $50 billion in Chinese goods as of July 6th, and a 10% tariff on another $200 billion of Chinese goods on September 24th. Then, the barbs really escalated, as China refused to be intimidated by the U.S.
In addition, the U.S. is preparing to announce by early December tariffs on all remaining Chinese imports if upcoming talks between President Donald Trump and his Chinese counterpart Xi Jinping fail to substantially diffuse tensions. But, the hope is that the upcoming meeting between these two leaders at the G20 Summit will yield some positive results. It is in both leaders’ best interests to have a productive conversation as both of their economies are getting weighed down by the threats, uncertainty and the dipping confidence.
If the talks do not go well, Wall Street firms have said they expect Trump will eventually hit the full half-trillion in Chinese imports with tariffs. If the Trump administration proposes tariffs on the remaining $267 billion or so in Chinese imports in December, the policy could be in place before spring, after a 60-day comment period. This would likely be a disastrous result, bringing on a full trade war and ultimately undermining confidence in our economy.
UBS analysts said the trade concerns are mostly limited to certain industrials and semiconductor companies. For instance, chip makers Texas Instruments and AMD both issued disappointing fourth quarter outlooks. Texas Instruments said demand is weaker and it is not stocking up on inventory ahead of tariff implementation. However, we are seeing that the economic environment is much more complicated than that and that the damage is widespread due to the complex global supply chains that we are a part of. As a result, companies are slowing down investment and hiring, their costs are going up and they are struggling as to how to manage those costs, and confidence is waning. If there is anything the market hates, it is uncertainty. And now we have it in spades and in weekly tweets.
Companies are taking all sorts of measures to avoid hits to margins. Costco, for instance, said it was working with suppliers to reduce costs and in some cases is reducing order commitments on impacted items. In other instances, those additional costs will be passed on to the consumer. It is essentially an additional tax which will slow growth and spending.
So, who is winning the trade war? When you’ve got plenty of supply in the world, and I think you do — plenty of industrial capability, plenty of raw materials and so on — it’s the buyer that has the upper hand, not the seller. The buyer has the ultimate power and who’s the buyer? US is the buyer, China is the seller. Economically there is no doubt the Chinese will (at least initially) suffer more from the trade wars.
Analysts said fear of trade wars and tariffs are a big factor behind the near 8 percent sell-off in stocks in October, and it is definitely contributing to the ongoing volatility. It has been said that nobody wins a trade war. And although China’s conduct had been far from honorable, let’s hope that a speedy resolution shows itself so that the international and domestic markets can get back to their normal functioning. And again, although many areas are impacted, sectors that could be most impacted by trade skirmishes have been hit the hardest. Materials are off the most, down 12 percent, followed by consumer discretionary, off 11 percent, and industrials, also off 11 percent. And that could just be the beginning!
The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change with notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
China exports to US grow despite Trump’s tariffs
Gabriel Wildau in Shanghai NOVEMBER 7, 2018
Published by Financial Times