Financial Review

Tariffs and Trade Wars

…Trump calls for tariffs on China. Chaos and selling ensues. House passes budget bill – nobody knows what is in it.

Financial Review by Sinclair Noe for 03-22-2018

 

DOW – 724 = 23,957
SPX – 68 = 2643
NAS – 178 = 7166
RUT – 35 = 1543
10 Y – .08 = 2.83%
OIL – .11 = 64.19
GOLD – 3.20 = 1329.60

The US will soon impose tariffs on billions of dollars of Chinese imports, a move that could eventually trigger a trade war. The tariffs, which function as a tax on imports, come in response to a Trump administration investigation into the China’s theft of US intellectual property, or IP. For instance, the country has forced businesses to move their patents to China or disclose their trade secrets to do business there. Trump will impose tariffs on imports of more than 100 different Chinese goods and hit industries from biopharmaceutical to robotics to rail equipment. A full list of products will be released in 15 days according to White House officials, which will give businesses time to petition for certain items to be excluded. The statement will also limit certain Chinese investments into the US. Chinese officials have already signaled they will respond with tariffs of their own.

 

Trump is frustrated over trade imbalances and the theft of intellectual property by China. His proposed tariffs aren’t likely to remedy the situation, and could make it worse. China’s Commerce Ministry issued a statement saying, “China will not sit idly to see its legitimate rights damaged and must take all necessary measures to resolutely defend its legitimate rights.” Reports suggest China will impose tariffs on US exports of the major agricultural products sorghum, soybeans, and hogs. More than half of the soybeans and sorghum exported by the US goes to China.

 

Before the newly announced tariffs take effect, the Office of the US Trade Representative will release a list of more than 1,000 possible tariff lines, technical codes that apply to a particular good. There will then be a 30-day comment period during which companies and industry groups can raise objections to certain goods being included in the tariffs. During this time there will also be a public hearing on the tariffs. After the comment period, the USTR will determine which goods the tariffs will apply to and release those findings. So, it could be well into May or June before the tariffs are fully implemented. The restrictions on trade will most likely push up prices on imports of Chinese goods. For businesses that use the imports in their end products, the tariffs will most likely drive up costs and lead to increased prices or cuts in other areas of business.

 

China is a major market for US agricultural products, cars, machinery, and other products. In 2016, China was the third largest market for US exports. Conversely, more than 41% of clothing and 72% of footwear sold in the US are made in China. Analysts believe that not only will US and Chinese businesses and consumers suffer from dampened demand and higher prices of goods, but other countries will experience collateral damage. US-China bilateral trade investment ties are integrated with global supply chains. So, a US-China trade war is necessarily going to have an effect on companies and consumers in other countries. And US-China relations are not good right now. The tariffs could encourage domestic Chinese sentiment to turn against the US. The announcement comes after the passage of a law allowing top US officials to visit Taiwan, a measure that China strongly opposes. Beijing views the self-ruled island as a “rogue province” that belongs to China. Truth is, we don’t know all the implications. We could have an all-out trade war, or the complexity of the global supply chain might limit the fallout. One thing seems highly probable – higher prices for consumer goods. Tariffs are essentially a tax. And while the Trump administration recently passed a tax break, the biggest beneficiaries were corporations. Tariffs will hit consumers squarely in the pocketbook. No surprise that Walmart and Target were each down 1.2% today. Boeing fell more than 5 percent. China has specifically threatened the US. aircraft maker if Trump raised levies. In 2016, the Communist Party newspaper said its Boeing orders, among them a $38 billion package announced when China’s president visited, could be replaced with Europe’s Airbus. Banks and insurers sold off as well. A slump in Treasury yields as investors sought havens weighed on the sector’s earnings prospects. JPMorgan Chase lost 4.2 percent. China’s Global Times — which has links to the ruling Communist Party – this week accused the U.S. of “dumping” soybeans, raising concern that the crop will be among the first items China targets. Currency depreciation could be one channel through which authorities in Beijing aim to increase the competitiveness of their products. The dollar rose 0.5 percent relative to the Chinese offshore yuan. China’s holdings of American bonds, notes and bills have already dipped to a six-month low as of January.

 

Given the possibility of a sustained trade fight, investors were jittery. Stocks moved lower on the open, in anticipation of the announcement. Early trading was moderate, and there just seemed to be an absence of buyers. Stocks dropped sharply after the announcement, closing at the low for the day. This was the sharpest drop since the 1,000-point daily declines we saw in early February.  The Cboe Volatility Index VIX jumped 31% to 23.35. Treasuries offered a safe haven, and that pushed yields on the 10-year note down 8 basis points, the biggest drop in yields since September. Caterpillar, 3M and Boeing – all with significant exposure to China – were among the biggest decliners. Bank and tech stocks also fell. Facebook was down almost 3% on top of an 8.5% fall over the first three days of the week. The Dow is now down about 1072 points in the month of March and might be looking at the worst month of March since 2001. The Dow is also more than 10% below its record high on Jan. 26, meaning we are back in correction territory.  The Dow closing low on Feb. 8 was 23,860 and the intraday low on Feb. 9 was 23,360 – so these are levels we would look for support. On the S&P 500, the support levels are 2580 close and 2531 intraday low from February.

 

The House of Representatives approved a $1.3 trillion spending bill to avert a government shutdown and fund federal agencies through Sept. 30. The Republican-led chamber backed the measure 256-167, sending it to the Senate ahead of a midnight Friday deadline. But 90 of the 238 House Republicans voted against it. Coupled with recently enacted tax cuts, the bill is projected to lead to budget deficits of more than $800 billion for this year. Conservatives balked at the deficit spending. Democrats complained that in the rush to pass the bill, few if any lawmakers had time to read through the 2,232-page tome to see what it actually contained. The bill was unveiled late on Wednesday.

 

Besides the $80 billion boost in military spending, the largest in 15 years, the measure includes new money for infrastructure improvements and combating Russian election hacking. In response to public anger and frustration over mass shootings, including a Feb. 14 massacre at a Florida high school, the bill also contains modest improvements to background checks for gun sales and grants to help schools prevent gun violence. Among the spending increases for non-defense programs are substantial healthcare investments, including a $414 million increase for Alzheimer’s disease research, $40 million more for research on developing a universal flu vaccine and $17 million more for antibiotic-resistance bacteria research – all at the National Institutes of Health. The spending bill devotes $1.6 billion to physical barriers and technology along the Southwest border. The funds cover 95 miles of “border wall system” – 47 miles of new barriers plus 48 of replacement barriers, according to the Senate Appropriations Committee summary. Despite negotiations in recent months, the bill doesn’t deal at all with “Dreamers” brought to the U.S. as children. Other components of the bill include $10 billion in infrastructure spending for highways, airports, railroads and broadband, and a $2.8 billion increase to fund treatment and prevention of opioid addiction and research into the subject.

 

Arizona’s seasonally adjusted unemployment rate increased from 4.8% in January to 4.9% in February. The U.S. seasonally adjusted unemployment rate remained unchanged at 4.1% in February. A year ago, the Arizona seasonally adjusted rate was 5.1% and the U.S. rate was 4.7%. Arizona gained 31,100 Nonfarm jobs in February. Arizona Nonfarm employment grew by 2.3% (63,900 jobs) over the year in February.

 

The Conference Board said its leading economic index rose 0.6% in February, following a 0.8% gain in January and a 0.7% rise in December.

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