Financial Review

Trade War On

…New tariffs on $200 billion in Chinese imports. China retaliates. Kavanaugh on hold. Senate passes opioid legislation. Florence death toll mounts.

Financial Review by Sinclair Noe for 09-18-2018

DOW + 161 = 26,223
SPX + 15 = 2904
NAS + 60 = 7956
RUT + 7 = 1710
10 Y + .05 = 3.05%
OIL + .84 = 69.75
GOLD – 3.20 = 1198.90


The Dow and S&P managed to erase yesterday’s losses, Nasdaq did not. FAANG Stocks gained on the day but were unable to erase yesterday’s losses. Wall Street doesn’t seem to care about the escalating trade war between the United States and China.


The White House late Monday released a statement imposing new tariffs of 10 percent on $200 billion in Chinese imports beginning Sept. 24 and expanding the levy to 25 percent beginning Jan. 1. When the new tariffs take effect, over half of all Chinese goods coming into the US will be subject to duties. The U.S. has already slapped $50 billion in tariffs on China, along with those on steel and aluminum. Today, China  hit back at the US with a fresh series of tariffs, knocking the trade war between the two nations up another gear. The Chinese Ministry of Commerce on Tuesday said it would levy tariffs of 5% to 10% on $60 billion worth of US goods sent to China, with 5,207 individual products affected. The new tariffs from Beijing are in line with what the ministry previously threatened, and they mean 85% to 95% of American exports to China are now facing tariffs. The tariffs are to take effect September 24, the same day the latest ones imposed by the US are scheduled to begin. China exports more to the US than the US exports to China, so China can’t really impose much more in the way of tariffs, but they can make trade much more difficult in other ways. China’s holdings of U.S. Treasury bills, notes and bonds dropped to a six month low of $1.171 trillion in July, from $1.178 trillion in June.


The tariffs under this new tranche include all but 300 items that were originally proposed by the Office of the U.S. Trade Representative before it held hearings seeking public comment about them over the summer. The China tariffs could be a “big blow” to U.S. consumers, the USTR’s Sept. 18 list includes computers, furniture, seats, lamps (lighting and parts), travel bags, agricultural and food products, vacuum cleaners, cooking appliances and refrigerators among other products. Among the 300 items left off the list are some Apple products and some consumer products, like bicycle helmets and child safety seats. Apple earlier this month appealed to the USTR to rethink putting some of its key products on the target list. Mr. Trump shot back, suggesting Apple move some plants to the U.S., but for now at least it appears Apple has avoided the hit many other companies will suffer. Many other products will likely see price hikes which will likely be passed on to consumers, either a little or a lot.


The ramped-up tariffs bring the tab for the average American family up to $127 a year, according to an analysis cited by the New York Times back in July. That number will climb to $270 if Trump imposes tariffs on all Chinese imports. For context, the Republican tax cut raises the take-home pay of middle-income households by an average of $930, according to an estimate by the Tax Policy Center. Perhaps no surprise, then, that while Americans narrowly disapprove of the tax overhaul, 61 percent give Trump a thumbs-down on his handling of trade negotiations, according to a poll last month by The Associated Press-NORC Center for Public Affairs Research.


If America’s net exports grow because America becomes a fashionable tourist destination and sales spike for Boeing airplanes and Harley motorcycles and soybeans from Indiana, then that will boost the economy. But if America’s net exports grow because new Trump-imposed taxes cause the price of imported goods to surge, then the economy is going to shrink.


At the last Fed interest-rate committee meeting in late July, Fed officials saw an escalation in trade disputes as a major downside risk and listed a litany of ways that the economy might be hurt. According to minutes of the meeting released last month, “Participants observed that if a large scale and prolonged dispute over trade policies developed, there would likely be adverse effects on business sentiment, investment spending, and employment,” and the possibility of a hit to the purchasing power of households, a reduction in productivity and a disruption in supply chains.


Fed policymakers will meet again in a two-day meeting ending Sept. 26. The market is pricing in over a 90% chance of a quarter-point rate hike. So, it is pretty much a lock that the Fed hikes rates next week. The markets have been pricing in another rate hike in December. Now, suddenly that December hike might not be a sure thing. And considering the tariffs are staggered, meaning the 10% tariff increases to 25% in January, maybe the Fed will skip rate hikes in early 2019. Of course, the Fed will base its monetary policy on current data; that means the rate hikes continue as long as the labor market remains tight and the economy looks strong. The idea behind the trade war is to hurt China’s economy before the US economy feels pain. However, this is a dangerous game of chicken.


If the plans succeed, a massive slowdown — or, worse, a reversal — in China’s economy could lead to a global financial crisis. The ripple effects of the world’s second-largest economy slowing down would hit nearly every market in every region and lead to billions of dollars lost throughout the world. One in four professional investors is bracing for global growth to slow over the next year, according to a Bank of America Merrill Lynch survey published on Tuesday. That’s the worst outlook in this monthly survey since December 2011 and up from August when just 7% of investors were pessimists. And nearly half of investors surveyed by Bank of America believe the US economy will decelerate and rejoin the rest of the world. Just one in three said that in August. The trade war topped the worry list for the fourth straight month. The second-most popular “tail risk” is related: a slowdown in China’s economy. The survey was taken last week, well before the latest tranche of tariffs.


Senate Judiciary Chairman Chuck Grassley has officially canceled a committee vote on Brett Kavanaugh’s Supreme Court nomination. The vote was scheduled for Thursday. As of now, a new meeting has not been scheduled. Kavanaugh’s nomination, once viewed as having a relatively clear path toward confirmation in the GOP-controlled Senate, now faces allegations that could delay his nomination past the November midterm elections. Kavanaugh has been accused of sexual assault in the 1980s, when he was in high school.


Oil futures rose more than 1 percent on signs that OPEC would not be prepared to raise output to address shrinking supplies from Iran.


Yesterday, two hydrogen-powered trains, the world’s first, began operating on a 62-mile stretch between four towns in northern Germany. The trains were built by the French firm Alstom, and their only emissions are steam and water. Their route was previously run by diesel-powered trains.


Tesla says the Department of Justice is investigating Chief Executive Elon Musk’s public statements in August that he was considering taking the electric carmaker private. The Justice Department asked Tesla for documents about Musk’s announcement, Tesla said, describing it as a “voluntary request.” The company said it was co-operating and that the matter “should be quickly resolved.” Bloomberg reported earlier that federal prosecutors had opened a criminal fraud investigation. Tesla did not say whether the Justice Department probe was criminal or civil. Tesla shares dropped 3.3% today.


Last night, the Senate overwhelmingly passed a package of bills aimed at addressing the nation’s deadly opioid epidemic. The package of 70 Senate bills costs $8.4 billion and creates, expands and renews programs across multiple agencies. It’s ambitious in scope, aiming to prevent the deadly synthetic drug fentanyl from being shipped through the U.S. Postal Service as well as allowing doctors to prescribe more medication designed to wean addicts off opioids. The House passed a similar measure in June, and the two chambers will need to negotiate a few differences before sending the package to Trump’s desk. The Centers for Disease Control estimates that of the 72,000 overdose-related deaths in 2017, 30,000 were caused by synthetic opioids. The Senate bill addresses the ease with which synthetic opioids are shipped from overseas.


Florence has killed at least 33 people since coming ashore as a hurricane on Friday, including 26 in North Carolina and six in South Carolina. One person was killed when Florence spawned at least 16 tornadoes on Monday in Virginia. More than 1,100 roads were still closed across North Carolina, including several portions of Interstates 40 and 95. Sixteen rivers in the state have reached major flood stages, with three more expected to peak in the next two days. The weather service says the storm dumped more than 8 trillion gallons of rain on North Carolina.

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