…China responds to US tariffs. Markets tumble, then recover, for now. Tariff losers and losers. Implications for global markets and central banks. Troops sent to the border. Nafta wiggle. Facebook breach grows.
Financial Review by Sinclair Noe for 04-04-2018
DOW + 230 = 24,264
SPX + 30 = 2644
NAS + 100 = 7042
RUT + 19 = 1531
10 Y un = 2.79%
OIL + .05 = 63.56
GOLD + .60 = 1333.80
China is planning to retaliate against the US in an escalating trade conflict. China will impose tariffs on more than 106 American products with a combined trading value of over $50 billion. U.S. farmers, plane- and automakers are likely to bear the brunt. The nation wasted no time firing back, making their announcement just hours after Trump made similar proposals on Chinese products. The news hit stock markets hard this morning. The Nasdaq Comp dropped 2.1% intraday. The S&P 500 was down 1.6%. The Dow Industrials slid 2.1%, or 510 points.
Trump’s list was notable for how hard it worked to minimize the pain felt by American consumers and Chinese businesses. It avoided disrupting major sectors and seemed to focus on products that could easily be substituted. By contrast, Chinese President Xi Jinping’s administration produced a heavily concentrated list that targeted politically sensitive industries such as planes, beef and soybeans. Covering only a little more than 100 products, but worth about the same as the U.S. list, these tariffs seemed designed to place severe pressure on key companies and constituencies.
The tariffs could be a huge blow to American growers. China is the biggest buyer of U.S. soybeans, picking up about a third of the entire U.S. crop. The trade is worth about $14 billion. Soybean prices dropped as much as 5.3 percent in Chicago trading, the most since July 2016, and closed down 2.2 percent. Cotton prices fell 2.9 percent. China is by far the world’s biggest buyer of soybeans, which are mostly crushed and fed to pigs. The tariffs on U.S. soybeans could ultimately drive up costs for Chinese pig farmers and meat prices for 1.3 billion citizens. Brazil and Argentina are the main competitors to U.S. growers in the market for soybeans and corn. They’ll be eager to pick up any lost business, but they won’t be able to completely replace U.S. trade. Argentina’s crop has been hurt this year by drought
China, which imported 36,000 vehicles from the U.S. in the first two months of the year, also plans to slap tariffs on most vehicles, including electric cars. Tesla is at particular risk as it relies on American-made vehicles for all its Chinese sales. Other U.S. carmakers such as GM and Ford manufacture in China. China’s proposed aircraft tariffs take aim at Boeing’s main source of profit, the 737 jetliner family. Boeing’s best-selling plane, the 737 Max 8, would narrowly escape the retaliatory measure, based on the weight limits outlined by the Chinese government. The biggest risk is for an older generation of 737 jetliners and General Dynamics’ Gulfstream jets. U.S. metals producers could benefit, and companies that use those materials as production inputs – such as machines and equipment manufacturers – could take a hit. And U.S. consumers could feel a pinch. Look for higher prices on TVs, appliances, printers, computers, pumps, and medical equipment.
Federal Reserve officials warn an escalating trade dispute between the U.S. and China is adding an unwelcome layer of uncertainty to an otherwise bright economic outlook, though it’s premature to say what the fallout means for jobs, inflation or monetary policy. St. Louis Fed President James Bullard told reporters Wednesday in Little Rock, Arkansas: “It increases the uncertainty around the forecast. It does present some downside risk, but generally speaking it is too early to tell what the actual impact will be on the U.S. economy.” Fed Governor Lael Brainard, speaking in New York Tuesday before China announced its response to the U.S. tariff list, said trade policy is “a material uncertainty” to the outlook. Researchers at the Dallas Fed said the metals tariffs would probably reduce U.S. gross domestic product by a quarter-percentage point over the long run. But any forecast depends on how far this trade conflict goes. A scenario in which “the EU and the U.S. engage in a trade war by imposing prohibitively high tariffs across all goods-producing industries, and the U.S. and China engage in a trade war by imposing prohibitively high tariffs across every industry” could reduce GDP by 3.5 percent, according to the analysis.
Make no mistake, the U.S. is now on the path to a trade war with China. Wars begin as skirmishes and then things tend to get nasty; with the potential to disrupt global value chains and world markets. The president is enamored with tariffs, and has wide authority to enact them, but it’s difficult to see how higher taxes on imports will do anything but harm to stock valuations. But today, the stock market stepped back from the trenches and decided that there is still the possibility of negotiation. Tariffs will take some time to implement. The hope is that cooler heads will prevail, and stocks will not break through the support of the February lows. The S&P 500 broke down under the 200-day moving average on Monday and bounced. It did not break below the February lows of 2532, which could be considered a “failure swing”. While the Dow is showing similar action, the blue-chip average has not recorded a closing violation of its 200-day moving average during its recent weakness. Even so, the index is also down about 10 percent for the year. While the Nasdaq surpassed its January peak to reach a record high in March, the index is now down about 9 percent from that top and threatening support at a trend line from its late-June 2016 trough, as well as its 200-day moving average. Analysts are also hoping that Corporate America will come to the rescue this earnings season, announcing fat profits and new stock buybacks to drag the S&P 500 out of correction territory. And they may very well be right.
One area to watch carefully is what China will do in the bond markets. Will they dump part of their holding of US Treasury debt?
One potential surprise could be the reaction of the central banks. The Federal Reserve is going to change its tune about higher interest rates. The European Central Bank will not stop its quantitative easing program come September. The Bank of Japan will continue on with its QE program. The People’s Bank of China will double down on monetary easing. It will not just be investors who have to do an about face. The world’s central banks will also make a turn in response to the fighting in the financial trenches.
Meanwhile, Trump is directing the National Guard to assist border patrol agents along the U.S.-Mexico boundary. Deployments to the border could begin tonight. The move follows Trump’s warning Tuesday to Mexican leaders that he would abandon the North American Free Trade Agreement without assurances of help on securing the border. Then about a half hour before the closing bell, the Trump administration softened a key Nafta demand for more North American content in car manufacturing — a potential olive branch on arguably the biggest sticking point in negotiations. That sent the loonie and the peso surging. The U.S. proposal would distinguish between different Nafta car parts by grouping them into five categories, some of which would have a lower requirement for North American content or none at all. While the U.S. had been pushing for 85 percent of a vehicle’s content to be sourced from the three Nafta countries to be traded tariff-free, its latest proposal would apply that threshold to major components such as transmissions and engines but not to the simplest inputs like nuts and bolts. Nafta currently requires a typical vehicle to have 62.5 percent North American content in order to benefit from tariff exemptions. One problem with the new plan is that no cars currently made in North America would meet the proposed requirement for 85 percent of major components to come from the region.
Facebook now says that the personal information of up to 87 million users may have been improperly shared with political consultancy Cambridge Analytica, up from a previous news media estimate of more than 50 million. Facebook released the revised estimate of affected users as part of an extended statement about its plans for handling personal data. The company said it would start alerting users on April 9 about whether their information may have been shared with Cambridge Analytica. In one week, Facebook CEO Mark Zuckerberg will testify before the House Energy and Commerce Committee about internet privacy and the need for regulation in the wake of the Cambridge Analytica scandal. One way or another, what he says will be a powerful lesson for entrepreneurs either in how to lead…or how not to. Shares in Facebook were down 1.4 percent on Wednesday to $153.90. They are down more than 16 percent since the Cambridge Analytica scandal broke.
The Institute for Supply Management said its non-manufacturing index fell to 58.8% from 59.5% in March. Readings over 50% signal more businesses are expanding instead of contracting and readings above 55% are considered exceptional. The tariff spat is starting to impact some businesses. The ISM survey quoted respondents in the construction industry as complaining about price volatility because of the tariffs.
ADP reports private-sector employers expanded their workforce by a seasonally adjusted 241,000 jobs last month. The ADP report is helpful as a guide to this Friday’s Nonfarm payroll report from the Labor Department. Nonfarm payrolls likely increased by 185,000 jobs after surging 313,000 in February. The unemployment rate is forecast falling one-tenth of a percentage point to 4.0 percent in March.
A new survey from the Institute of International Finance found investors pulled a “remarkable” $40 billion from U.S. equity market funds in the closing weeks of March