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U.S. Steel Recovers from Three-Year Low: Is It a Dead Cat Bounce?

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U.S. Steel stock

U.S. Steel (X) and other steel players including AK Steel (AKS) and Nucor (NUE) are trading with sharp gains today. Interestingly, steel stocks are in the green even as broader equity markets including the S&P 500 are in the red. Last month, we saw a massive sell-off in US steel stocks amid the escalation in the US-China trade war. Incidentally, U.S. Steel hit a three-year low last week.

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Downgrades

Last month, a flurry of downgrades hit US steel stocks. US steel prices have fallen sharply this year. We saw weakness in steel prices in the second half of 2018 also. US steel prices have now pared their post-tariff gains. Since steel companies’ earnings are sensitive to spot steel prices, there’s been a sell-off in steel names in tandem with falling steel prices.

However, after the sharp fall in US steel prices, there seems to a realization in markets that we might have seen the worst of the correction. Unless we see a major escalation in the US-China trade war, which can’t be totally ruled out at the moment, US steel prices might be near their bottom.

Steel stocks

Steel stocks also fell last month as markets repriced steel names in line with current steel prices. However, the road ahead still looks bumpy for steel names, especially U.S. Steel. The company is investing heavily in its plants and would have to take on more debt over the next two years as its organic cash flows might not suffice for its investments. Read Despite a 25% Tariff, US Steel Stocks Fall to 52-Week Lows for more analysis.

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