Financial Review

Trade War

…$50 billion in tariffs on Chinese goods. Trade war launched.  Manafort in jail, likely to flip; maybe Cohen, too.
Financial Review by Sinclair Noe for 06-15-2018

DOW – 84 = 25,090
SPX – 2 = 2779
NAS – 14 = 7746
RUT – 0.82 = 1683
10 Y – .02 = 2.92%
OIL – 2.57 = 64.32
GOLD – 23.00 = 1279.90

 

It’s a trade war. At least that’s what China is calling it. Stock market investors are starting to think it’s more than posturing. The day’s losses were concentrated in the Dow Jones Industrial Average, which has outsize exposure to the kind of multinationals that are the most correlated to trade issues. While the S&P 500 turned lower for the week with the day’s decline, the Nasdaq remained near the record it closed at yesterday.

 

In March, Trump announced plans for at least $50 billion in tariffs over longstanding concerns about China’s unfair trade policies that required U.S. companies to transfer technology to China’s domestic businesses, as well as the theft of trade secrets. Then in April, the administration provided a preliminary list of technology goods that the U.S. might target for tariffs. The decision stems from the conclusions of a Section 301 investigation launched in August that found that China’s theft of intellectual property is costing the U.S. economy billions of dollars. The U.S. has already imposed tariffs of 25 percent on steel and 10 percent on aluminum from a wide range of nations, including allies in the European Union, Canada, and China.

 

Today, Trump announced levies of 25 percent on $50 billion of Chinese goods. The first round of tariffs on 818 products worth $34 billion will go into effect on July 6. A second batch of 284 products valued at $16 billion will undergo further review. The list does not include popular goods purchased by U.S. consumers such as cellphones or televisions. In a statement, he said while he valued his friendship with Chinese President Xi Jinping, “trade between our nations … has been very unfair, for a very long time. This situation is no longer sustainable.” China’s Commerce Ministry released a statement saying the United States has “launched a trade war.” And we are just one week past a disagreeable G7 meeting that ended on a sour note. Singling out China’s trade practices and economic policies for criticism or punitive action might be one thing, but Trump has done the same for U.S. allies. Two weeks ago, he imposed tariffs of 25 percent tariffs on steel and 10 percent tariffs on aluminum imports from Canada, the EU, and Mexico, citing national-security concerns. Seriously, Canada was labeled as a national security threat. They reacted angrily and imposed retaliatory tariffs. Both Canada and the EU have complaints about China’s trade practices similar to those of the U.S., and they could have been reliable allies in persuading Beijing to alter its policies in order to make trade with it more balanced. (Mexico, fearing the demise of NAFTA, is meanwhile cozying up to China.)

 

Historically, tariffs slow down trade volumes, increase costs, and hit margins. It’s a no-win situation across the board, and it could result in a significant downdraft on GDP from a global basis, depending on how severe it becomes. Jobs could be lost.  Look for higher prices and a resurgence of inflation as the supply chain tightens. This could put the Federal Reserve in an untenable position of trying to stabilize prices as the economy slows. Given how strong earnings projections are, it would be extremely unusual for this to be a down year in stocks, but a trade war could do it. Fears of tariffs and a potential global trade war have barely rattled Wall Street over the past few months. There is a sense among investors that it is more talk than walk. The market has become comfortably numb to tariff talk. They are becoming more accustomed to this being a first foray and negotiating tool. Bluster eventually runs out. You can cry wolf too often. Trump’s view that trade wars “are good and easy to win” could soon be tested.

 

Meanwhile, Paul Manafort, the former chairman of Trump’s presidential campaign, is in jail. Manafort was on supervised release since being indicted by the special counsel Robert Mueller’s office in October. He has pleaded not guilty to nearly two dozen charges related to tax and bank fraud, money laundering, making false statements, and failure to register as a foreign agent. Most recently, he and his associate Konstantin Kilimnik, a former Russian intelligence operative, were charged with conspiracy to obstruct justice and obstruction of justice after Mueller’s office accused them of attempting to tamper with potential witnesses. Prosecutors last week asked US District Judge Amy Berman Jackson to revoke Manafort’s bail, arguing that he had violated the terms of his release. He is now in jail while he awaits trial. Manafort is 69 years old. He has never been in prison. Tonight, he will sleep on a prison cot. Manafort now has 3 possible options: 1) a presidential pardon; 2) spending the rest of his life in jail; 3) flipping. If you think Manafort will be exonerated by a jury of his peers, tell it to your unicorn.

 

There are several problems with a pardon. It is a political hot potato. There’s also no guarantee that pardoning Manafort would prevent prosecutors from learning what information he knows. When a defendant is pardoned, they lose their Fifth Amendment right against self-incrimination. That means Mueller’s team could serve Manafort with a grand-jury subpoena after a pardon, forcing him to be a witness against a bigger target. That leaves life in jail or flipping. Meanwhile, Trump’s former personal lawyer, Michael Cohen, whose offices were raided but who has not been formally charged, is reportedly close to flipping. This could be a very interesting weekend.

 

The Empire State manufacturing survey rose 4.9 points in June to a reading of 25, the highest reading since October.

 

The University of Michigan’s gauge of consumer sentiment rose to 99.3 in June.

 

Industrial production fell in May for the first time in four months, but the drop-off was largely the result of a major fire at an auto-parts supplier for Ford trucks instead any weakness in the U.S. economy. Industrial production in the U.S. edged down by 0.1% last month. Yet even if cars and trucks are excluded, production was on the softer side. Output of consumer goods and business equipment outside the auto sector both fell.

 

Adobe Systems lost 2.2%,  a day after reporting its quarterly results.

 

Teva Pharmaceutical dipped 0.8% after the drugmaker said it would discontinue the phase 3 trial of its treatment for chronic cluster headaches.

 

Qualcomm extended its cash tender offer for NXP Semiconductor outstanding shares. This is at least the 25th time that Qualcomm has done so over the past 16 months. Shares of Qualcomm rose 0.4% while NXP was up 0.7%.

 

Etsy rose 3.3%, extending a massive surge in Thursday’s session that took it to record levels. The gain came after it raised its revenue outlook and fee structure. The stock has jumped more than 30% this week.

 

Dropbox shares soared for a second day in a row, capping a rally this week for the cloud storage vendor and other newly public software companies. Dropbox surged 32 percent, adding almost $4 billion in stock market value since last Friday. Zuora and DocuSign both jumped more than 10 percent for the week.

 

The Wall Street Journal reports Apple will release a new iPhone lineup this fall with three new models. Oprah Winfrey has signed a multi-year content partnership with Apple to create programs that will be released as part of Apple’s direct-to-consumer video service.

 

Federal prosecutors filed criminal charges against Theranos founder Elizabeth Holmes and the blood-testing company’s former No. 2 executive, alleging that they defrauded investors out of hundreds of millions of dollars and also defrauded doctors and patients.

 

McDonald’s has joined the fight against plastic pollution by switching to paper straws at its restaurants in the United Kingdom and Ireland. The change, which will begin to take effect in September, follows trials of paper straws at select locations. The McDonald’s said a majority of its customers supported the move away from plastic. Plastic straws are the sixth most common type of litter globally.

 

The European Commission cleared Comcast’s $30 billion bid for European pay-TV giant Sky PLC. The Comcast offer tops the one made by 21st Century Fox which holds a 39% stake in Sky and made a bid in 2016 for full ownership. Interestingly, Comcast is now in a bidding war with the Walt Disney for some of Fox’s entertainment assets, which include Fox’s stake in Sky.

 

Now that AT&T has acquired Time Warner, Time Warner will change the name to WarnerMedia. AT&T is still AT&T.

 

You’ve probably received a bunch of emails from companies telling you that they’re changing their privacy policies, and perhaps asking you for permission to keep sending you email. These emails are coming because of the General Data Protection Regulation — better known as GDPR — a set of European Union privacy regulations that went into effect on May 25. And so you stopped everything to read through the privacy policies and contemplated the importance of privacy in your digital life, and maybe even considered how the new GDPR rules put you in charge by being able to opt-in rather than defaulting to whatever the company throws at you. Or, more likely, you just deleted the email. Internal research from Huge found about 38 percent of Americans are ignoring these emails, and 23 percent have actually used them as an opportunity to unsubscribe. Email marketing firm PostUp has even grimmer stats, estimating that only 25 to 30 percent of recipients globally, and only 15 to 20 percent in the U.S., are opening the emails at all.

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