Trade Deal: Wake Me Up When September Ends!

On September 1, the US-China trade war escalated even more. The US started levying a 15% tariff on $110 billion worth of Chinese goods entering the US. The first tranche of China’s retaliatory tariffs on $75 billion worth of US goods entering China also came into effect.

Will the tariff war impact the trade deal?

US tariffs are applicable on footwear, clothing, textiles, and smartwatches, while Chinese tariffs apply to crude oil, soybean, meat, and poultry. The tariffs on the remaining $160 billion worth of Chinese goods will come into effect on December 15 if the countries haven’t reached a trade deal. The Chinese yuan weakened to 7.1732 compared to the US dollar on Tuesday compared to the previous close of 7.1543.

President Trump has given mixed signals about his level of optimism regarding the trade deal between the US and China. However, escalating tariffs could impact the US-China trade deal. The US and China’s negotiating teams will likely meet in Washington this month.

Consumers might feel the pinch 

On September 1, China’s Global Times criticized President Trump for “shooting Americans in the foot” with fresh tariffs. For the first time, the Trump administration targeted large volumes of everyday consumer products. While the weaker Chinese yuan might take most of the burden from tariffs on US households away in the short run, it isn’t a long-term solution. US companies want to move production away from China. Last week, the Nikkei Asia Review reported that Google is moving the production of its Pixel phones to Vietnam. If the production moves back to the US as President Trump wants, US households will have to pay more.

Apple in focus

On August 30, President Trump attacked US companies that oppose the tariff war. The notable companies include Apple (AAPL), Boeing (BA), Tesla (TSLA), Ford (F), and General Motors (GM). President Trump said that the companies are “badly run and weak.” For the first time, Apple has been impacted directly by the trade war. Apple Watch and other products were impacted by tariffs starting on September 1. On August 16, President Trump and Apple CEO Tim Cook discussed the tariffs. President Trump said that the meeting was “very good.” However, he has a fresh stance on opposing companies.

Trade war pressures automakers 

In early August, President Trump said that the Fed and the strong dollar make it hard for companies like Boeing and carmakers to export. The Chinese yuan weakened to a multiyear low. While President Trump said that Boeing is “great,” he also said that it’s “badly run and weak” in the same month. Ford and General Motors have been in President Trump’s line-of-fire lately. Last month, he targeted Ford for making an emission deal with California. On August 30, President Trump targeted General Motors for moving plants to China. Notably, China’s 25% tariffs on US cars will be effective on December 15. The tariffs could hurt Ford and General Motors. The companies face falling vehicle sales in China and the US. The weak yuan and the strong dollar also impact Ford and General Motors.

The ongoing trade war impacts Tesla, which is building Gigafactory in China. Last month, the company had to raise prices earlier than expected due to the falling Chinese yuan. While Gigafactory could help Tesla save costs and escape tariffs on Model 3, it will still have to pay tariffs on higher-end models if a trade deal isn’t reached.

Will the trade war get worse?

Since President Trump announced fresh tariffs unexpectedly in May, hi-tech companies have remained in focus. President Trump’s strict stance against Huawei angered China. For companies like Qualcomm (QCOM), Micron (MU), and Broadcom (AVGO), China is the biggest market. Also, Huawei is an important customer. In 2018, US component makers including Qualcomm, Micron, and Intel (INTC) generated $11 billion in revenues from Huawei alone, according to Reuters. Qualcomm, Micron, and Broadcom generate over half of their revenues from China. Notably, China accounted for a quarter of Intel’s revenues in 2018. Chipmaker stocks have had a bumpy ride since the trade war escalated in May. With 15% tariffs on made-in-China laptops and cellphones coming in effect in December, chipmakers might face more challenges. A trade deal could be a boon for semis.

All eyes are on the Fed

As the trade war rages on, markets seem to be looking at the Fed to continue economic expansion. The Fed is scheduled to meet on September 17–18 to decide on interest rates. The Fed will also release its quarterly summary of economic projections. The tone of the projections will likely be less upbeat. There are recessionary signs flashing elsewhere. Last month, the US manufacturing PMI pointed to a contraction. The PMI is a leading economic indicator. The US Treasury yield curve is flirting with inversion. Even the yields on 30-year bonds have fallen below the ultra-short-term yields. President Trump is already attacking the Fed. He wants a bigger rate cut.

Stocks feel pressure

August was tough for American indexes. The S&P 500 (SPY) fell 1.8% in August, while the tech-heavy Nasdaq (QQQ) fell 2.6%. A trade deal or the Fed would only provide short-term respite to already bloated equities.

In contrast, if the US-China trade deal doesn’t happen and economic indicators remain subdued, fears of a recession will likely hit the market hard. Inverse ETFs could be a way to make money in the falling stock market.

September is important due to trade deal negotiators’ meeting and the Fed’s meeting. Let there be peace in the markets!