The markets were just grappling with the news of increasing trade tensions between the US and China when President Donald Trump stepped in to further increase the pressure. According to CNBC, while speaking with reporters today, he said, “We are talking to China; we are not ready to make a deal, but we’ll see what happens…China wants to do something, but I’m not doing anything yet. Twenty-five years of abuse. I’m not ready so fast.” He also said that the trade talks scheduled to happen with China in September might not happen.
Stock markets tumbled after Trump’s comments
The markets fell on renewed trade war fears. The S&P 500 (SPY), the Dow Jones Industrial Average (DIA), and the Nasdaq Composite (QQQ) were down 1.1%, 0.87%, and 1.4%, respectively, as of 12:05 PM ET today.
US semiconductor stocks in the red on Huawei news
Especially hard-hit were US semiconductor stocks. Bloomberg reported overnight that the US administration was holding off giving licenses to US companies to use Huawei products. Today, Trump exacerbated those concerns for chip stocks by saying that the US is “not doing business with Huawei.”
US semiconductor stocks plunged after the news. The VanEck Vectors Semiconductor ETF (SMH) was down 2.2% at 12:05 PM ET. Micron Technology (MU), NVIDIA (NVDA), and Skyworks Solutions (SWKS) were down 3.4%, 3.5%, and 4.1%, respectively. Huawei is one of these semiconductor stocks’ biggest customers. They all discussed the ban and its impact on their performances in the latest earnings season.
While the US’s issues with Huawei have been ongoing for months, last month, President Trump agreed to give timely licenses to US companies such as Broadcom and Google to do business with Huawei. Therefore, the latest news came as a blow to these companies.
Trade war is escalating quickly on tit-for-tat moves
This move from the US came after China asked its state-run enterprises to halt their purchases of US agricultural products. This move from China was, in turn, triggered by Trump’s decision to levy 10% duties on $300 billion worth of Chinese imports starting on September 1. In retaliation, the Chinese central bank also moved to devalue the Chinese yuan to offset some of the negative effects of the rising tariffs. With these tit-for-tat moves from both sides, the trade war—and now the currency war—is escalating quickly.
The winners in a protracted trade war
In fact, many investment banks, including Goldman Sachs and Credit Suisse, now don’t see a trade deal happening between the US and China before the 2020 US presidential election. Read Goldman Sachs Sees No Trade Deal before the 2020 Election for more on this topic.
In what now seems to be a long-haul trade war, there are still a few winners. US Treasury securities are drawing huge investor inflows as trade war fears exacerbate recession risks. These inflows have led to bond yields sinking and spreads narrowing. Gold is another winner as a result of the trade war’s escalation. Gold prices are touching six-year highs as investors seek a safe haven. The SPDR Gold Shares ETF (GLD) has returned 16.3% as of August 7 compared to to the S&P 500’s (SPY) gain of 15.2% in the same period.