China trade deal
The US and China have reached the first phase of the trade deal after struggling for over a year. The “very substantial” deal happened after 13 rounds of talks between US and Chinese officials. According to the partial trade deal, President Trump agreed to call off the tariff hike on Chinese imports. President Trump planned a 30% tariff on $250 billion Chinese goods on October 15, which was originally scheduled for October 1. China agreed to purchase US agricultural products worth $50 billion. The deal also requires China to address US concerns related to intellectual property and financial services.
The news sent a wave of optimism across broader equity markets, semiconductors, and many other sectors. The Dow Jones rose by 319 basis points or 1.21% on October 11 after President Trump announced the so-called “very substantial” deal. The S&P 500 and the Nasdaq Composite rose 1.09% and 1.34%, respectively, on October 11. Apple (AAPL), Boeing (BA), Tesla (TSLA), Ford (F), and General Motors (GM) stocks rose 2.66%, 1.06%, 1.29%, 1.86%, and 2.63% on October 11 amid trade deal optimism.
Semiconductor stocks also got a boost from the trade deal news. Micron (MU) and Advanced Micro Devices (AMD) rose more than 4% on October 11. Marvell (MRVL) and NXP Semiconductors (NXPI) stocks rose more than 3%, respectively, due to the favorable trade truce. Qualcomm (QCOM) and Broadcom (AVGO) each rose about 2.3% on the same day. Intel (INTC) rose about 1.9% as trade war concerns eased.
Analysts’ concerns about the trade deal
Despite reaching an agreement, some economists still seemed anxious. They’re concerned that the agreement might be a “temporary truce.” The “uncertain” partial trade deal also raised analysts’ concerns.
According to some economists, the first-stage of the trade deal doesn’t look like a genuine deal. Analysts also think that the trade deal didn’t touch the real sticking points. They think that the agreement didn’t address sensitive issues like cybersecurity and the ban on 28 Chinese companies. Last week, the Trump administration banned eight more Chinese companies from doing business in the US.
Since President Trump didn’t remove the existing tariffs, analysts weren’t sure about the suspended December tariff hike on Chinese goods. According to Morgan Stanley, there might be another tariff hike. Goldman Sachs also thinks that President Trump could impose the upcoming 15% tariffs. However, the tariffs might be delayed until early 2020. An Evercore analyst expects a delay in the tariffs with no additional tariff hikes in 2020. J.P. Morgan thinks that the trade tensions could escalate during the 2020 presidential election.
Trade deal uncertainty looms over chip stocks
Chip stocks have been suffering since the trade war escalated in May. Semiconductor stocks have high exposure to China and supply most of the products to China, especially Huawei. Therefore, the Huawei trade restriction dented chip stock sales.
In 2018, US component makers, including Qualcomm, Micron, and Intel, generated $11 billion in revenues from Huawei, according to Reuters. The Huawei trade ban also impacted Qualcomm. Micron’s sales to Huawei fell significantly in the fourth quarter due to the trade ban. NVIDIA’s deal to acquire Mellanox (MLNX) faces challenges due to escalating trade war fears.
Chipmakers might face more challenges if President Trump continues with the 15% tariff plan on December 15. Earlier, President Trump planned to put an additional 10% tariff on $110 billion Chinese goods in December. The additional tariffs on Chinese imported goods might raise the prices of graphics cards, which would hurt AMD and NVIDIA. The tariff hike would also raise Apple’s costs to assemble iPhones and MacBooks.
With more uncertainty about the partial trade deal, we don’t think that chip stocks have a reason to celebrate. Meanwhile, a delay in China’s tariffs might benefit chipmakers to an extent. Chip stocks are also waiting for President Trump to lift the trading ban on Huawei. Recently, several US companies urged the Department of Commerce to grant licenses to sell US goods to Huawei.
We shouldn’t lose focus on semiconductor players at the current level. Any positive development in the trade deal could accelerate chip stocks in the near term.