Prospects for a Trade Deal are Cooling…

361 Capital Market Commentary | May 20, 2019

Few like lukewarm tea. It either needs to be piping hot or ice cold. As we patiently wait for the U.S. and China to strike a deal, the market is becoming impatient as the war of words and tit for tat is becoming more expensive for both sides. Tariff threats are increasing, specific companies are being targeted, and even giant pandas are being moved. Once again, companies are discussing new trade and tariff impacts to their top and bottom lines with some of the giant retailers specifically mentioning it in their earnings reports last week. Again, we don’t know how this ends in the short term, but we can’t figure that the White House would allow the China trade issue to impact their 2020 election hopes. We got a hint of the playbook last week when the Executive Office backed away from the global auto tariff issue that was due on Friday. You have to figure that they don’t have the bandwidth to fight two of the biggest trade wars in the world at the same time.

Complicating global matters further is the ramping military presence in the Middle East as tensions with Iran build. You have to be somewhat surprised at how calm the oil markets are with all the activity. Shipping stocks, however, are on fire as they anticipate soaring rates due to a massive logistical deployment of supplies. The U.S. two-year Treasury yield has pulled back to 2.2% as risk taking seems like a less wise bet. A big positive for the market remains credit, as spreads remain near lows. As long as credit holds together, stocks will be unlikely to trade back to their December lows. So we will watch, wait, and fire up another pot of tea.

The China trade war is looking to become more expensive than we initially believed…

 

President Donald Trump’s trade war with China could cost the average American family of four up to $2,300 a year, according to a report on the effect of tariffs on the U.S. economy and workers.The study, by the economic consulting firm Trade Partnership Worldwide, assesses how tariffs will affect American consumers and the economy. According to the report, an average American family of four would pay $2,300 more in goods and services each year if Trump imposes a 25% tariff on all goods from China, as he has repeatedly threatened. If tariff levels remain where they are today, the average American family is expected to pay about $770 in higher costs each year the tariffs remain in place, says Laura Baughman, a co-author of the study and president at Trade Partnerships Worldwide.

The findings come as Trump and China have both escalated the trade dispute in recent days. As U.S. and Chinese negotiations met in Washington last week, Trump announced that he was raising tariffs from 10% to 25% on $200 billion worth of Chinese goods. China responded with a plan to increase tariffs on $60 billion in U.S. exports. Then, on Monday, the Trump Administration outlined plans to impose additional tariffs on another $300 billion worth of Chinese imports, providing a list of products that include apparel, children’s toys, crafting products, sports equipment and shoes. That amounts to tariffs on virtually all Chinese imports.

(Time)

One genius way to impede trade…

 

The ultimate tariff? New Trump tariff list includes, er, shipping containers...

Walmart and other retailers will be raising prices due to increased China tariffs…

 

“We will do everything we can to keep prices low, but increased tariffs lead to increased prices,” Chief Financial Officer Brett Biggs said in a Thursday morning interview. “It’s very item- and category-specific. There are some places where as we get tariffs, we will take prices up.” Finding alternative manufacturers “is one of a number of actions that our merchants are considering.”

Tariffs, according to Evercore ISI analyst Greg Melich, are “the next key swing factor,” as they could “wipe out” earnings growth across the sector this year.

It’s not a Walmart-specific issue: Macy’s Inc. said Wednesday that the latest tariffs, if implemented, would likely be reflected in its prices. Ralph Lauren Corp. also said after reporting results this week that consumer price-hikes could be an end result, though it’s first trying to work with Chinese suppliers to drive down costs and further diversify its supply chain out of China.

(Bloomberg)

You can bet that many retailers will be raising prices as much as they can…

 

Tariffs will be an excellent excuse for retailers and other importers to raise prices in excess of their actual incremental costs

Can’t imagine Toyota is looking to put a new auto plant in the U.S. anytime soon…

 

In an unusually strong-worded statement, Japan’s largest automaker said Trump’s proclamation Friday that the U.S. needs to defend itself against foreign cars and components “sends a message to Toyota that our investments are not welcomed, and the contributions from each of our employees across America are not valued.”

The company said it has spent more than $60 billion building operations in the country, including 10 manufacturing plants…

“Our operations and employees contribute significantly to the American way of life, the U.S. economy and are not a national security threat,” the company said.

(Bloomberg)

Speaking of Capex, easy come and easy go…

 

Trumps tariffs have fully reversed the upswing in business confidence, capex, and eps growth from his late 2017 tax cuts

The trade wars are having an adverse impact on EM stocks as trade and currency uncertainty grows…

 

@elerianm: And while on divergence, this Bloomberg chart showing the underperformance of equity markets in Emerging Markets, including during the lastest bounce in advanced country stocks. It’s a reversal from earlier this year but a return to the prior trend.

Emerging market stock performance is getting worse relative to the broad market

For the week, Emerging Market stocks were the worst performers…

 

Stocks 5-17-2019
(5/17/2019)

Punching the semiconductor industry over the weekend was the U.S. blacklisting of Huawei…

 

The Trump administration on Friday blacklisted Huawei — which it accuses of aiding Beijing in espionage — and threatened to cut it off from the U.S. software and semiconductors it needs to make its products. The ban, which had been anticipated, hamstrings the world’s largest provider of networking gear and No. 2 smartphone vendor.

Blocking the sale to Huawei of critical components could also disrupt the businesses of American chip giants like Micron Technology Inc. and retard the rollout of critical 5G wireless networks worldwide — including in China. That in turn could hurt U.S. companies that are increasingly reliant on the world’s second largest economy for growth.

If fully implemented, the Trump administration action could have ripple effects across the global semiconductor industry. Intel is the main supplier of server chips to the Chinese company, Qualcomm provides it with processors and modems for many of its smartphones, Xilinx sells programmable chips used in networking and Broadcom is a supplier of switching chips, another key component in some types of networking machinery. Representatives for the chipmakers declined to comment.

(Bloomberg)

Semis were breaking out in 2019…

 

Then the China Trade wars accelerated. And now their outperformance looks seriously challenged.

Semi Conductor Index
(@HumbleStudent)

It was a risk-off week among the U.S. equity sectors as only REITs, Utilities and Staples gained…

 

Semis and Banks, on the other hand, made 20% divots in their YTD gains.

Sectors 5-17-2019
(5/17/2019)


China and auto effects are ripping apart one of America’s bluest blue chip stocks…

 

3M blew their earnings a month ago but has continued to see significant selling as the outlook for trade with China, plus the slowing global auto industry, gets worse.

3M Stocks

And it won’t get better for 3M or the other auto industry suppliers…

 

Rising auto loan problems will cause lenders to pull back from the business leading to lower auto industry production volumes.

Serious auto-loan delinquencies – 90 days or more past due – jumped to 4.69% of outstanding auto loans and leases in the first quarter of 2019, according to New York Fed data. This put the auto-loan delinquency rate at the highest level since Q4 2011 and merely 58 basis points below the peak during the Great Recession in Q4 2010 (5.27%).

These souring auto loans are going to impact banks and specialized lenders along with the real economy – the automakers and auto dealers and the industries that support them.

(WolfStreet)

Auto Loan Delinquencies Surge

Wow Spain. For comparison, the U.S. 10 -year bond trades at a 2.38% yield…

 

@jsblokland: BREAKING! #Spain 10-year bond #yield, now at 0.85%, falls to the lowest level on record.

Spain 10 Yr Bond Yield


A big time in the U.S. equity asset management industry as passive catches active…

 

Assets in passive domestic stock funds have grown to $4.3 trillion, the same amount held by active managers, as of the end of last month. According to Morningstar, parity between active and passive has been the inevitable result of twelve years of relentless outflows from active funds coupled with a steady flow into passive assets.

(InstitutionalInvestor)

Percentage of assets in US equity funds by investment type

You may dislike Facebook, but their social media domination remains impressive…

 

Social Media Monthly Active Users

Cell phone bloody cell phone…

 

An estimated 60% of drivers are now using their cellphones while behind the wheel. The distractions are having disastrous consequences. The cellphone providers and companies could easily solve this if they wanted to. Maybe they prefer that the U.S. Government get involved?

Tragedy on the roads - Roads by death by type of user - Pedestrians deaths, per billion vehicle miles driven
(TheEconomist)

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