Trade War Slam
…Trade talk heats up, stocks slammed. Harley not made in America? Flake and Corker try for a jailbreak. SCOTUS backs Amex, and gerrymandering. Toys R Us r gone. GE shrinks from Dow.
Financial Review by Sinclair Noe for 06-25-2018
DOW – 328 = 24,252
SPX – 37 = 2717
NAS – 160 = 7532
RUT – 28 = 1657
10 Y – .03 =2.88%
OIL – .39 = 68.19
GOLD – 3.80 = 1266.10
Trump is ratcheting up his threats to slap levies on imports from around the globe. On Sunday he tweeted that “all countries” will face new tariffs if they don’t lower their own trade barriers. On Friday, Trump threatened to impose 20% tariffs on European cars in response to the EU’s decision to impose 25% tariffs on more than $3 billion worth of U.S. goods as retaliation for U.S. tariffs on steel and aluminum that the Trump administration put into effect on June 1. Trump has already warned China that the U.S. will seek additional tit-for-tat tariffs on Chinese exports if China slaps retaliatory tariffs of its own on U.S. exports. The Wall Street Journal reported Sunday that Trump plans to bar several Chinese companies from making investments in U.S. tech. The newspaper also reported that the administration wants to block additional technology exports to China. Both measures are expected to be announced by the end of the week. Sunday’s message may indicate a similar stance toward the European Union.
So, we started the trading session with the sense that trade wars might be spiraling out of control. Treasury Secretary Steven Mnuchin tweeted “the stories on investment restrictions in Bloomberg & WSJ are false, fake news.” As the Dow Industrials dropped more than 400 points, Peter Navarro – the administration’s trade advisor – went on CNBC to attempt more damage control, saying a forthcoming Treasury Department report will focus on China, and with respect to other countries, there’s “nothing on the table.”
The day’s losses were widespread, with 26 of the Dow’s 30 components trading lower, along with nine of the 11 primary S&P 500 sectors. Tech was the biggest decliner of the day, however, dropping 3% in its biggest one-day decline since March. The Dow closed below its 200-day moving average for the first time in a couple of years, or 501 days to be exact – going back to 2016 and the Brexit vote. Today’s losses were widespread, but technology stocks took a big hit. Apple fell 1.5% while Alphabet was down 2.6% and Facebook lost 2.7%. Microsoft was down 2%. Netflix fell 6.5 percent — its biggest drop since July 2016. Netflix gained about 5 percent last week and the stock is up roughly 100 percent in 2018. Semiconductor shares took a big hit, with the Philly Sox Index down about 3%. Chipmaker Micron shed 7 percent. AMD and Nvidia each fell more than 4 percent. Intel dropped 3.4 percent. Stocks have been in a sideways struggle since the Standard & Poor’s 500-stock index last peaked on Jan. 26. Traders are jittery, as the VIX, or volatility index spiked over 25%. Today, the bond market weighed in as the yield curve continued to flatten. The gap between two-year and 10-year United States Treasury notes was roughly 0.34 percentage points. It was last at these levels in 2007. The curve has not inverted, which would almost certainly signal recession, but it is getting flatter.
Harley-Davidson plans to shift a portion of its U.S. motorcycle manufacturing capacity to foreign markets after the trade spat between Trump and the European Union led to increased tariffs. The Milwaukee-based motorcycle manufacturer said in a public filing that the move is necessary to preserve its second-biggest sales market. Harley-Davidson said it would not raise the suggested prices of its motorcycles to cover the cost of the tariffs – estimated at about $2,200 per motorcycle exported from the US to Europe. It expects, at least for a little while, to bear the additional expense of the tariffs itself, which would cost the company an estimated $90 million to $100 million a year. Over the longer term, Harley-Davidson, intends to make more motorcycles in countries that are not subject to the tariffs. That plan could take nine to 18 months to put into effect. Harley did not specify whether it would close any U.S. plants or lay off any workers. But when Harley recently mapped out plans to shift some production to a new factory in Thailand, the company announced it would close its plant in Kansas City, Missouri, and add some jobs at a facility in York, Pennsylvania. Harley Davidson closed down about 6% today.
Boeing said it won a commitment from startup air carrier Bamboo Airways, a wholly-owned business of Vietnam-based industrial conglomerate FLC Group, to buy 20 787-9 Dreamliners in a deal that could be valued at $5.6 billion. On a day when trade tensions were center stage, a big sale was not enough. Boeing shares dropped 2.3%.
Senator Jeff Flake says he’s ready to put his vote where his mouth is to push back on Trump’s trade offensive. Flake said he will block Trump’s judicial nominees until the Senate votes on a bill to limit the president’s power to levy tariffs. Flake’s threat to take matters in his own hands is real enough: He serves on the Judiciary Committee, where Republicans claim only an 11-to-10 advantage. And the party has no votes to spare in the full Senate, since the GOP’s majority stands at 51 and Flake’s senior colleague, John McCain, is home for cancer treatment. There’s some evidence he’s not alone. Sen. Bob Corker, another Trump critic emboldened by his impending retirement, said Sunday there’s a “jailbreak brewing” among congressional Republicans on the trade front.
Flake, on ABC, called for Republicans to “stand up on issues like tariffs facing us right now. We’re if the nascent stages of a full-scale trade war. And the president simply seems to want to escalate. And it all stems to the steel and aluminum tariffs. Congress ought to stand up and say, no, we’re not going to do that. You can’t use section 232 to claim that Canada is a national security threat. That’s not who we are.”
Corker has drawn eight Republican cosponsors — and five Democrats — for a bill that would force the president to get congressional approval before imposing tariffs in the name of national security. Corker failed to get that measure attached to the defense authorization bill, as he had aimed. But Senate Republicans demonstrated during that debate that they’re willing, in some circumstances at least, to stand up to the president on trade matters: They added language to the bill reinstating penalties on Chinese telecom company ZTE. On Friday, the EU tariffs on $3.2 billion of goods went into effect. We haven’t really felt the impact of tariffs yet, even though it has affected supply chains – the big hit is coming soon. On July 6th, tariffs on the first $34 billion in Chinese goods take effect — and trigger Chinese retaliation against American farmers and exporters.
The Supreme Court today ruled that American Express did not violate federal antitrust law by prohibiting merchants from discouraging customers from using their Amex card. In the 5-4 decision in Ohio v American Express, Associate Justice Clarence Thomas said the anti-steering provisions that American Express has employed since the 1950s was legal. American Express shares rose 1.3%, while Mastercard lost 3.2% and Visa dropped 3.25%.
The Supreme Court sided with Republicans in Texas and North Carolina on Monday in two more cases on the issue of politicians manipulating electoral district boundaries for political gain, known as gerrymandering. The justices upheld a batch of Republican-drawn legislative districts in Texas. Separately, the justices threw out a lower court ruling that had struck down North Carolina’s Republican-drawn U.S. House districts, directing that the decision be revisited in light of its ruling in a Wisconsin gerrymandering case last week that also preserved a Republican-drawn electoral map. The Supreme Court for decades has invalidated state electoral maps due to racial discrimination but has been reluctant to intervene over district boundaries drawn purely for partisan advantage.
The Commerce Department reported today that new home sales were 6.7% higher than a downwardly-revised April pace, and 14.1% higher than a year ago. The median sales price for newly constructed homes in May was $313,000, 3.3% lower than a year ago. With a faster selling pace, it would take less time to exhaust available inventory: 5.2 months at the current pace, compared to 5.4 months in April.
Retirement investors, you’re back on your own. Just a year after it took partial effect, the so-called fiduciary rule — a requirement that financial professionals put their customers’ interests ahead of their own with retirement accounts — has effectively died. Last week, a federal appeals court dealt a final blow to the rule. The court decision said the Department of Labor, which oversees retirement accounts, overstepped its authority. The department did not try to defend the rule after the appeals court’s initial decision, experts said, and it let a deadline pass to petition the Supreme Court to hear the case.
Toys R Us will close its final 200 US stores on Friday. Toys r Us filed for bankruptcy in September in hopes of turning around. But terrible Christmas sales left it on life support. The chain had 735 US stores when it announced plans to go out of business in March. In addition to competition from big box and online retailers, Toys R Us was doomed by an unsustainable debt load that came in the wake of being taken private by KKR, Bain Capital and real estate firm Vornado in 2005.
Shares of General Electric were off 2.3% after a report that the conglomerate is nearing a deal to sell its industrial-engine unit for $3 billion to private-equity firm Advent International. GE also ends its tenure as a Dow component at the end of Mondays’ regular session.