In a shocking development yesterday, the Chinese trade delegation canceled planned goodwill visits to farms in Montana and Nebraska. This development comes right after the delegation finished trade war talks in Washington.
Trade war update: China cancels US farm visits
The delegation was planning to visit American farms next week to meet the farmers affected by the trade war. The abrupt cancellation of the visits casts doubts over the interim trade deal between the US and China that the market is expecting to happen.
Markets were quick to respond to the dark clouds over the trade deal. US indexes, which were trading in the green, fell sharply after the announcement. The S&P500 index (SPY) closed 0.5% down yesterday while the Dow Jones and Nasdaq lost 0.6% and 0.8%, respectively.
Semiconductors and Apple in focus
Because of the canceled trips, semiconductor stocks underperformed the broader market yesterday. Qualcomm (QCOM) lost 2.3% and Intel (INTC) lost 1.65%. Broadcom (AVGO) and Micron (MU) lost 1.3% each. All these companies rely heavily on China for their business.
Qualcomm, Broadcom, and Micron derive over half their revenues from China while Intel derives about a quarter of its revenues from China. With US Tariffs on made-in-China cellphones and laptops expected to come into play on December 15, semiconductor stocks are highly sensitive to trade war-related news.
Apple (AAPL), which is at the forefront of the trade war, lost 1.5% yesterday. Apple manufactures get most of their products in China through contractors like Foxconn. Tariffs coming in effect on December 15 will hamper Apple’s profitability. Apple is a vocal opponent of the trade war. Apple is also looking to move some production out of China. Many other companies are looking to move out of China.
Trade War Update: Trump does a U-turn
In classic Trump fashion, President Trump said that he is not looking to make an interim trade deal. In the past, he has said he was having second thoughts on the trade war, only to later say he wanted to double the tariffs. Trump said that he doesn’t intend to end the trade war before the 2020 election. While Trump is sounding upbeat about the US position in the trade war, economic indicators and numbers tell a different story.
US manufacturing PMI is flirting with the contraction zone. Business investments have slowed. Inflation is still undershooting the Fed’s target. This week, FedEx (FDX) reported its fiscal 2020 first-quarter results. Its EPS fell sharply, and it provided a dismal outlook for the year. FedEx blamed the trade war for its gloomy performance and outlook.
What’s next for the tariff war and Trump?
With more tariffs coming into play in December, the trade war could get uglier. China is also levying 25% tariffs on American cars starting December 15. That is going to affect carmakers like Ford (F) and General Motors (GM). Both these automakers have seen sales dwindling in the home market as well as in China. Competition from electric vehicle makers like Tesla is also intensifying.
Tesla stock lost 2.4% yesterday. Tesla (TSLA) is trying to escape the tariffs by building a Gigafactory in China. The factory will produce Tesla’s Model 3 locally. Apart from escaping the trade war, producing cars in China will also help Tesla to cut down manufacturing costs.
The trade war is also escalating into a currency war with China weakening yuan to help exporters. Trump also wants the Fed to cut rates rapidly to weaken the dollar. As for the Fed, it has maintained a measured approach towards the monetary stimulus. If the trade war continues, even the Fed won’t have many options but to loosen its purse to sustain the expansion. President Trump may not have much time at hand before the primaries to see that happen.