Financial Review

What Wall?

…Stocks fall. Trade war heats up. NATO summit – what wall? Senators flake. Oil tumbles – pick a reason. PPI up. Comcast counters.

Financial Review by Sinclair Noe for 07-11-2018

DOW – 219 = 24,700
SPX – 19 = 2774
NAS – 42 = 7716
RUT – 11 = 1683
10 Y – .03 = 2.84%
OIL – 3.50 = 70.61
GOLD – 14.00 = 1242.00

 

The 4-day winning streak has snapped. The declines knocked the Dow back to breakeven for the year. That’s a dramatic departure from the Nasdaq, where highflying tech stocks have lifted the index 12% in 2018. Netflix has more than doubled this year, while Amazon has soared 50%. Even the broad S&P 500 is still up by 4%, not great but not down.

 

Industrial names including Boeing, 3M and Caterpillar, which have been among the hardest hit throughout the recent trade dispute, were among the Dow’s biggest drags today. The small-cap Russell 2000 has a solid 10% gain in 2018. It’s a bet that domestic companies will avoid the brunt of a global trade war. It makes sense that the Dow has been left in the dust. A trade war would inflict the most financial pain on multinational and industrial companies. Boeing, the highest-price stock in the Dow, makes more than half of its revenue outside the United States. That’s a big deal because the Dow assigns a greater weighting to members with higher prices. Caterpillar, another pricey Dow member, gets one-fifth of its revenue from Asia. 3M, the Post-It maker relied on Asia for 31% of its sales last year. That’s nearly as much as 3M made in the United States. It’s not just the Dow reflecting trade jitters. Over in the commodities market, copper, which is highly sensitive to economic growth, plunged 3.6%. The materials index, down 1.7 percent, was another big negative influence among sectors, with Freeport-McMoRan down 3.7 percent as copper prices hit their lowest in about a year. Soybeans fell to a 10-year low after China included them in its list of retaliatory tariffs.

 

Late Tuesday, the Trump administration forged ahead with a threat to impose tariffs on another $200 billion of Chinese goods. Trade officials released a list of thousands of additional products that could face a 10% tariff. This third wave of tariffs would go into effect after August 30. So, it looks like we are on the verge of an all-out trade war. Hopes for a quick resolution on trade have faded. Maybe it is just a coincidence but we seem to hear about an escalation in trade tension after a few days of market stabilization, as risk sentiment rebounds.

 

Now, Wall Street is on high alert for tariff-related warnings from CEOs during the upcoming earnings season. Harley-Davidson recently said that tariffs could cost the motorcycle maker $100 million. Similar disclosures could cast a shadow over what is otherwise strong profit growth from Corporate America. The economy and corporate profits have been hot enough lately to seemingly insulate America from the trade war’s chill. Wall Street is looking for a really strong earnings season. If fully enacted, the tariffs would erase about a quarter of the benefits of the corporate tax cuts. And that’s before China launches some of its unconventional weapons, including raising new roadblocks to U.S. businesses. And it is hard to calculate the damage done to the global supply chain.

 

Case in point: soybeans. Crop prices have plunged because of a worldwide boom in farming production that’s led to a giant commodity glut. Meanwhile, exports have actually been a crucial bright spot for American farmers: Measured by tonnage, the U.S. sells a little under half of its total soybean production overseas, with almost 60 percent of those exports headed to China alone last year. U.S. soybean exports were already down 22 percent through the first five months of this year, and the great fear among growers is that they could end up permanently losing market share in China as buyers there shift to other suppliers, particularly Brazil, while Trump’s trade conflict wears on.

 

An initial blast of tariffs, mostly targeting $50 billion in Chinese goods, was tailored by the Trump administration to minimize the damage to the U.S. economy. Consumers or businesses could more easily find substitutes for goods whose prices would rise due to higher U.S. tariffs. The proposed new tariffs would not kick in until the end of August. For now most consumers don’t have to worry much, but in about 3 or 4 months we could feel the pain. and the price of many imported consumer goods in the crosshairs of the White House could begin to rise. China exported about $500 billion in products to the U.S. in 2017. They encompass a vast range of goods such as fabrics, clothing, vacuum cleaners, refrigerators, computers, lighting and so forth — the kind of goods that are no longer made in America or are only made in small quantities. And look for car and truck prices to take a hit, top-selling vehicles such as a Toyota Corolla, Honda CR-V or Ford F150 could rise by up to $1,000 each. The bottom line is that the longer the trade issues linger, the worse it gets, and there is potential for it to get really bad.

 

Senators voted overwhelmingly today calling on Trump to get congressional approval before using national security as a reason for imposing tariffs on other nations, as he did recently with steel and aluminum levies against Mexico, Canada and the European Union. The bipartisan 88-to-11 tally on the non-binding resolution sends a message to the White House about how frustrated senators are over Trump’s disruptive moves on tariffs. On Tuesday, the Senate voted 97-2 in favor of a pro-NATO resolution, just as Trump was touching down in Brussels and blasting the security alliance on Twitter.  Two days, two sharp rebukes from the Senate. So what?  Non-binding resolutions will not change what is happening with NATO or with tariffs, however, it is a meaningful change for judicial nominations. Senator Jeff Flake had been blocking nominations of appeals court judges as leverage for forcing a vote on the tariffs measure. That stalled action in the Judiciary Committee and on the floor while GOP leaders worked to find a way to assuage Flake. Flake initially insisted he would only accept a vote on a “substantive” measure but accepted the non-binding resolution instead. So, Flake rolls over and will now lift his “holds” on those judges, in exchange for absolutely nothing.

 

NATO’s Brussels summit kicked off with Trump berating allies for not spending more on defense, calling on allies to increase spending to 4% of GDP. Trump also claimed that “Germany is totally controlled by Russia,” because gas and stuff. The slight which did not go over easy with Angela Merkel, who grew up in Soviet-controlled East Germany, which was back before they tore down the wall.

 

The Energy Information Administration reported a 12.6 million-barrel drop in U.S. crude supplies for the week ended July 6. That was more than double the 4.8 million-barrel decline expected by analysts. You might think a drop in inventory would result in higher prices. Not today. West Texas Intermediate crude fell $3.50, or 4.7%, to settle at $70.31 a barrel on the New York Mercantile Exchange, marking the steepest drop in dollar terms since Sept. 1, 2015. What’s behind the drop? Take your pick. Libya is set to resume export. Saudi Arabia reports Mike Pompeo will issue waivers for U.S. sanctions on Iranian oil. The Saudis have already pledged to increase production. Trump is expected to pressure Russia to increase production. EIA sees U.S. crude output nearing 12 million barrels a day next year. Or maybe oil traders like to push prices higher just before a holiday when people are hitting the highways, like the 4th of July – and then they take profits.

 

The producer price index rose 0.3% June. The wholesale cost of goods and services rose in June at the highest yearly rate in almost seven years, reflecting broad inflationary pressures in a fast-growing U.S. economy. The 12-month rate of wholesale inflation, meanwhile, climbed to 3.4% from 3.1%, marking the highest perch since the waning months of 2011. Somewhat less worrisome, the yearly rate of core wholesale inflation stood at 2.7% and was several notches below a recent high. The specter of oncoming trade wars did not appear to have much effect. The cost of some products such as rolled steel increased, but there was little evidence of widespread disruption. It’s still early.

 

In a separate report, wholesale inventories in the U.S. jumped 0.6% in May as companies boosted production to meet growing demand for their wares. Sales shot up 2.5% in the month. The ratio of inventories to sales, meanwhile, fell to 1.24 from 1.27. That’s how many months it would take to sell all the inventory on hand.

 

Earlier today, Twenty-First Century Fox raised its offer for Sky to about $32.5 billion. This afternoon, Comcast raised its cash offer for Sky to $34 billion, topping Twenty-First Century Fox’s latest bid. The two media giants have been in a bidding war for the British television group. Fox had originally reached a deal to buy the part of Sky it does not already own in December 2016. The Rupert Murdoch-controlled company was widely expected to win regulatory approval in the U.K. this week. Comcast said its upped bid has been recommended by the independent committee of Sky. The company also said it has earmarked funds to fulfill the terms of the deal.

 

Shares of CA Technologies soared more than 16 percent in extended trading, after the Wall Street Journal reported that Broadcom was close to acquiring the software company for about $18 billion. Shares of Broadcom edged down more than 5 percent.

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