Who Blinks First?

361 Capital Market Commentary | May 13, 2019

The U.S./China trade wars accelerated just like last night’s battle on HBO. First the POTUS warned China (via Twitter) not to retaliate against our tariff hikes. Thirty minutes later China retaliated with their own new set of tariffs (via press release). The markets reacted immediately this morning setting dragon fire to any stock sector in the way of an escalating trade war: Semiconductors, Technology, Retail, and Emerging Markets were hit especially hard. Industrial commodities and Junk bonds were also torched as fears of a wider economic slowdown grew.

And just like at Kings Landing, it is much easier to pick the losers than the winners. With grain prices continuing to implode, the U.S. farmer looks even more harmed. John Deere and the Ag equipment suppliers have got to be wondering when this will end. This new round of tariffs is going to cost consumer households anywhere from $500-750 annually as their basket of Walmart, Target and Amazon goods rise in price to reflect the trade tax increases. A slower consumer and rising prices will mean fewer unit sales and margins at Retailers. If China follows through with its plan to slow Boeing plane orders, one of America’s largest supply chains could see further stoppages after its 737 Max fiasco.

Where are the winners? Bonds. As the global economy slows, investors will head to the safety of Treasuries. And don’t forget that the Fed will be very accommodating and likely lower short-term rates as the slowdown blooms. Falling rates should be good for the stock markets unless investors give up on the trade strategies of Washington D.C. In the near term, few know how this will evolve. It can get much better or much worse overnight given the chaotic nature of the players involved. But looking out eighteen months, it is easier to bet that the trade wars will be in a better place, either under this POTUS or the next one.

Who knows when this will end?

 

We might need to wait until the dragon lands, village stops burning and Twitter is uninstalled.

Trump Sounds Like Tariff Man, Not A Dealmaker
(@TayTayLLP)

This insight from a top Chinese reporter helped rattle the U.S. stock market today…

 

Hu Xijin Tweet

This next round of Chinese tariffs is going to hurt every American household…

 

…the higher tariffs set to go into force Friday would apply 25% levies on more than $40 billion worth of items purchased directly by consumers—furniture, handbags, clothing, Christmas decorations, fire alarms and other things shoppers find on the shelves at Target, Walmart, Macy’s and other stores.

Previously only about $1 billion worth of consumer imports faced tariffs so high. What’s more, President Trump said he is prepared to expand the 25% levies to virtually everything imported from China—$539 billion worth of goods…

Items that will be subject to higher tariffs starting Friday include electronic circuit boards, computer chips, chemicals and other parts and business supplies. But also affected would be a wide range of consumer products, including grocery items, textiles, clothing, sporting goods, soap, lamps and air conditioners.

“Tariffs are taxes paid by American businesses and consumers, not by China,” said David French, a senior vice president at the National Retail Federation. “A sudden tariff increase with less than a week’s notice would severely disrupt U.S. businesses, especially small companies that have limited resources to mitigate the impact.”

(WSJ)

U.S. Retail stocks break lower…

 

@ArthurHill: $XRT, which failed at its falling 200-day SMA, is breaking below its March low and leading the way lower. Not good for the consumer discretionary sector $RCD.

SPDR S&P Retail ETF

Last year, the Chinese retaliated by placing tariffs on soybeans which caused our farmers market share to fall from 40% to near 5%…

 

@M_McDonough: Price of China Soybean Imports from Brazil vs. the U.S. (with Market Share) #TariffsHurt

Price of China Soybean Imports from Brazil vs. The U.S. (with Market Share)


The world’s largest buyer of soybeans has left the U.S. market…

 

As a result, U.S. inventories have piled up causing decade-low prices…

Most active soybean contract falls to lowest since late 2008

(Bloomberg)

The financial pressures on farmers and the Ag economy will swing political votes in states with large soybean acreage…

 

Planned Soybean Acreage in 2018 and Trump States
(@JoshuaGreen)


An increasing trade war with China will hurt the Yuan value versus the U.S. dollar…

 

This will make it even cheaper to trade with China which then begins to negate the effects of the increasing in trading tariffs. Don’t forget that China owns $1 trillion in U.S. debt which also increases in value as their currency declines. So China does have some counter-measures in place.

USD/CNH (inverted)
(WSJ/DailyShot)

Coming this Friday… the Global Auto trade war!

 

Carl Quintanilla Auto Tariffs Tweet

As we have discussed, rising trade wars will bring out the Fed doves…

 

A trade war is a negative supply shock

The market continues to price in at least one cut in 2019…

 

Probability of Fed Rate Cut in 2019
(WSJ/DailyShot)

In fact, the probability actually rose into the 70’s after today’s trade war escalation…

 

The market is pricing on an October rate cut

Housing stocks will have an easier interest rate environment to sell a home into…

 

Of course, they will not be able to use any wood or metal imported from China. Also, they will have to build the homes by hand since power tools will also be made in China.

 

Lower home rates should help home sales

The ramping trade wars played havoc with risk assets last week…

 

Asset Returns 5-10-2019
(5/10/2019)

Among the sectors, the best performing Semi group was taken apart by fears of new taxes on everything made with a chip…

 

Sector Returns 5-10-2019
(5/10/2019)

A hot issue in Congress right now is the drug price difference between the U.S. and International countries…

 

While there are several important differences to account for, if you are a member of Congress with voters paying 3-4x more, it just doesn’t matter. Expect Washington to lower the hammer on drug manufacturers.

US vs international prices for Medicare Part D drugs
(J.P. Morgan)


I thought this was a joke until I saw it posted multiple times…

 

If this chart does not make you want to sell everything, then you are not human…

This was a slide from SoftBank's investor presentation today

The designer of this product does not have school age kids…

 

I saw a Mom get a death stare from her ten year old at Starbucks yesterday just for reaching for a straw. Guessing the daughter would have screamed ‘Dracarys’ had her Mom bought a can of plain water.

Liquid Death Mountain Water

Catch up on past Weekly Research Briefings >