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Sep 19, 2018

The Finance 202: The stock market is shrugging off Trump's trade war. That may not last: The Washington Post.


By Tory Newmyer


THE TICKER

Traders work on the floor of the New York Stock Exchange last week. (AP Photo/Richard Drew)
President Trump delayed announcing his major escalation of the trade fight with China on Monday until after the markets closed. It turns out that wasn’t necessary.
Investors on Tuesday shrugged off the news that the U.S. will start slapping 10 percent tariffs on $200 billion in Chinese imports — with more and steeper tariffs possibly soon to follow, as China readies its own response. All three stock market indexes closed higher — with the Dow Jones industrial average rising .71 percent to close at 26,246.96.
Market watchers offered varying explanations. Some called it a “relief rally,” as investors responded positively to the revelation that Trump is imposing 10 percent tariffs for now, rather than the 25 percent levies he had been threatening. Others said the market has already priced in the specter of the trade dispute between the world’s two largest economies turning uglier.
But investor placidity could have a perverse effect: That a president who keeps tabs on the market’s performance as a proxy for his own will see the results from Wall Street as a green light to keep raising the stakes in his confrontation with Beijing. (As Evercore Partners founder Roger Altman predicted in a Wall Street Journal op-ed back in July, “The global financial markets will act as a safety net. If the Trump trade war starts to squeeze economic growth, markets will react badly. When this happens, the impatient American president will have no choice but to declare victory, call off the war, and limit the damage.”)
Now, investors could be misreading the risks. That’s the opinion of Scott Minerd, managing partner at the global investment and advisory firm Guggenheim Partners. “People tend to do what they did yesterday. The good news from the tax cuts has kept the market optimistic,” Minerd tells me. “But at the same time there’s a slow erosion that’s occurring under the surface, and tariffs are just one part of that.”
Dialing up tariffs on the $200 billion in Chinese goods to 25 percent — as the administration has said it will do on Jan. 1 — would bring real economic harm, according to Guggenheim's projections. The firm calculates the move will shave .75 points off economic growth next year. The damage climbs to 1.1 points if Trump slaps 25 percent tariffs on all Chinese imports.

A ship to shore crane prepares to load a 40-foot shipping container onto a container ship at the Port of Savannah in Savannah, Ga. (AP Photo/Stephen B. Morton)
Those outcomes went from theoretical to pending this week. Yet even industrial stocks that have been considered bellwethers for trade tensions rallied Tuesday. Boeing, for example — which relies on China as its largest foreign market — climbed 2.1 percent. Chris Higgins, an analyst who covers the stock for Morningstar Equity Research, says the company isn’t as vulnerable to a disruption in U.S.-China trade as market punditry has suggested.
That’s in part because Airbus, Boeing’s chief competition for supplying mid-sized passenger planes to China, has no ability to produce extra aircraft over the next several years, Higgins says. And Beijing likewise would struggle to replace orders of larger planes from Boeing without damaging the country’s burgeoning domestic travel industry in the bargain. “It could get worse, but it would have to get really bad to for the government to cancel deliveries of planes it’s already ordered,” Higgins says.
But investors weren't so sanguine about how Boeing would fare earlier this year. As we wrote here back in April: “Boeing was among the poorest performers back on April 4, sliding 1 percent after China announced it would respond to U.S. tariffs with 25 percent duties of its own on American exports. A week later, it gained 3.8 percent, the best performer in the Dow, after Chinese President Xi Jinping delivered a speech that sought to cool the confrontation.”
What's changed? “The simple answer is I'm not sure it’s knowable,” says Carter Copeland, Melius Research’s lead aerospace and defense analyst. But he suggests the same tide lifting Boeing could be helping the broader market float above trade jitters.  “Could you make the case that the market’s getting conditioned to this news flow and activity? Maybe. Clearly, that’s a viable thesis to explain what we’ve seen, at least today,” he says. “This is a complex ecosystem. The economy is pretty hot right now, so the market has been discounting [a trade war]. That may not continue for a long time.”
Or as Minerd puts it, “This has the potential to do more damage, and it’s a matter of time before the market wakes up it.”
You are reading The Finance 202, our must-read tipsheet on where Wall Street meets Washington.
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TRUMP TRACKER
TRADE FLY-AROUND:

President Trump at the White House on Sept. 18. (Alex Brandon/AP)
— China retaliates with tariffs. The Washington Post's David J. Lynch and Danielle Paquette: “China said Tuesday it would retaliate for [Trump’s] latest tariff salvo, risking further U.S. trade actions that could result in what some analysts are calling an economic Cold War. By next week, the United States and China appear likely to be on the brink of slapping tariffs on their entire goods trade, which exceeds $635 billion annually. Chinese officials in Beijing said they would meet the 10 percent tariffs that Trump announced Monday on nearly $200 billion in imports with similar measures on $60 billion in U.S. products. If that occurs, Trump has said he will ‘immediately’ begin the process of applying tariffs to all Chinese items entering the United States...
"As hopes dim for an early end to the conflict, the likelihood grows that the two countries are moving toward some sort of commercial divorce. Some analysts anticipate an economic partition reminiscent of the globe-splitting divide between the United States and the Soviet Union following World War II.”
Beijing voices confidence. The Post's Danielle Paquette: “China’s second highest-ranking official delivered a confident message Wednesday amid the looming trade war with the United States: Beijing will survive. The remarks from Premier Li Keqiang to a crowd in the port city of Tianjin seemed directed at [Trump] — without invoking his name — as fresh tariff announcements bring the United States and China closer to an all-out out trade war. ‘China’s development over the past decades has always been achieved by overcoming all sorts of different obstacles and challenges,’ he said ... ‘Each time, we managed to pull through,’ Li added.”
And says it won't weaponize its currency. CNN Money's Daniel Shane and Jethro Mullen: Li "told an audience of global executives and policymakers that China would not weaken the yuan to boost trade with the rest of the world. 'China will never go down the path of stimulating exports by devaluing its currency," [Li] said Wednesday."
— Tim Cook's Trump ties appear to pay off. The Washington Post's Tony Romm and Damian Paletta: “Apple chief executive Tim Cook has been one of [Trump’s] staunchest critics in Silicon Valley, opposing the White House on immigration, climate change and more. But the 57-year-old tech leader has also become one of the technology industry’s savviest political operators — a behind-the-scenes Trump whisperer, able to shape some of the administration’s economic policies in ways that benefit Apple and some of its tech peers...
"The initial list of imports the White House had threatened to penalize included some of Apple’s best-known products, the company said earlier this month, such as its recently updated Apple Watch smartwatch, HomePod home assistant and AirPods wireless headphones (but not the iPhone). On Monday evening, though, those products were spared.”
SunPower also scores an exemption. Reuters: “SunPower Corp on Tuesday said some of the solar cells and panels it produces overseas will be excluded from the Trump administration’s 30 percent import tariffs, sending the company’s shares up 15 percent. SunPower is based in San Jose, California but produces most of its solar products in Mexico and the Philippines.”
As do Chinese art and antique dealers. "Among items removed from the initial list of goods targeted for duties are those covering paintings, sculptures, collages, ceramics and historical collectibles, along with antiques older than 100 years," Bloomberg writes. "Critics of the tariff plan said it would discourage private collectors and dealers from acquiring Chinese art and cultural items, and because museums rely on donations, they and the viewing public would suffer."
But Joann doesn't. Bloomberg News's Matthew Townsend: “Joann, the crafting and arts supplies chain, took the rare step last month of recruiting its millions of customers to help thwart [Trump’s] tariffs on Chinese goods. That didn’t work out so well. The closely held retailer highlighted 30 categories of products with proposed tariffs -- everything from cookie cutters to yarn and fabric -- that it wanted to be spared. But only two were left off the finalized list released on Monday.”

Canadian Foreign Minister Chrystia Freeland at the Canadian Embassy in Washington on Aug. 31. (Jose Luis Magana/AP)
— Talks with Canada resume. Bloomberg News's Josh Wingrove: “High-level Nafta negotiations are set to resume in Washington" as the U.S. and Canada push to reach a deal before the next deadline. "Canadian Foreign Minister Chrystia Freeland will arrive in the U.S. capital Tuesday evening and talks with U.S. Trade Representative Robert Lighthizer are due to resume Wednesday. Only a few days likely remain until a handshake deal would need to be reached in order to generate text of an agreement by Sept. 30, which is the deadline to allow a new version of the North American Free Trade Agreement to be signed before Mexico’s incoming president takes office.”
U.S. businesses: Canada belongs in NAFTA. The Wall Street Journal's William Mauldin and Paul Vieira: “U.S. business groups sought Tuesday to increase pressure on the Trump Administration to retain the existing structure of the North American Free Trade Agreement, urging U.S. officials to avoid advancing a new version of the pact that includes Mexico but not Canada. ‘It would be unacceptable to sideline Canada, our largest export market in the world,’ wrote the heads of the U.S. Chamber of Commerce, the Business Roundtable and the National Association of Manufacturers in a letter to U.S. Trade Representative Robert Lighthizer."
Progress with Europe. Politico: "Brussels and Washington believe they have found a recipe for a speedy transatlantic trade deal: Think small. [Lighthizer] is pushing to 'finalize outcomes' with the EU by November... The EU has agreed to push for this 'early harvest.' It is increasingly clear that severe differences over cars and farming mean a mega deal will have to wait. Instead, any near-term deal will focus on regulatory cooperation on topics such as car blinkers, cosmetics, insurance and driverless vehicles."
Anti-tariff Republicans face squeeze. NYT's Jim Tankersley and Ben Casselman: "Top Republicans in Congress love Mr. Trump’s tax cuts, but they do not love the tariffs that have become the centerpiece of his trade policy. This combination is a classic conservative position that favors low taxes, whether on income or on imports. Few Americans outside Washington share that view.  That leaves Republican congressional hopefuls with few safe options. Candidates who embrace Mr. Trump’s trade policies risk turning off independent voters, as well as the business leaders who are a key part of the Republican donor base. But bucking Mr. Trump could alienate many Republicans. The results could help explain why congressional Republicans have done little to block Mr. Trump’s tariffs."

A strike could hold back the industry at a time when it is benefiting from federal intervention aimed at boosting production and employment.
Jeff Stein
MELTDOWN WATCH:
MARKET MOVERS

The New York Stock Exchange on June 25. (Seth Wenig/AP)
JPMorgan: Time to cut U.S. stocks for emerging markets. Bloomberg's Lu Wang: "For the last few months in stocks, the world’s loss has often seemed like America’s gain. The S&P 500 is up almost 9 percent while everything else is down more than 6 percent, taken as a whole. It won’t last. This is the latest warning from JPMorgan Chase & Co. strategists led by Marko Kolanovic, who say to cut holdings in U.S. equities and add money in emerging markets. As the benefits from [Trump’s] tax cuts dissipate, the world’s largest economy is set to lose its edge in growth, they said... The call goes against a herd of money managers who are embracing U.S. stocks with increasing ardor. According to Bank of America Merrill Lynch’s latest investor survey, allocation to America rose to the highest since January 2015 while exposure to emerging-market equities fell to the lowest in more than two years.
— Benefits rise more than wages. WSJ's Te-Ping Chen and Eric Morath: “Americans’ compensation is growing, but workers might not notice it in their regular pay. The value of benefits—including bonuses and vacation time—grew at a faster rate in the 12 months ended in June than wages and salaries, according to data the Labor Department released Tuesday. That extended a long-running but slow shift in compensation toward benefits and away from wages. The cost of benefits for private-sector employers rose 3% in June from a year earlier, while the cost of wages and salaries advanced 2.7%.”
As cash-strapped Americans tap home equity to cover bills.  Bloomberg: "As U.S. household debt rises and wages stagnate, millions of Americans are tapping into home equity to keep up with day-to-day expenses. Twenty-four million homeowners believe borrowing against home equity is an acceptable way to cover regular bills, according to a Bankrate.com report released on Wednesday. Cash-strapped millennials, low earners and the less educated were most likely to think home equity offered an appropriate solution to ordinary bills."
POCKET CHANGE

Tesla chief executive Elon Musk in Hawthorne, Calif., on Sept. 17. (Chris Carlson/AP)
— Tesla faces DOJ probe. The Post's Drew Harwell, Devlin Barrett and Matt Zapotosky: “The Justice Department is investigating Tesla over statements chief executive Elon Musk made last month about taking the company private, Tesla said Tuesday. Department investigators requested documents from the company last month related to Musk’s announcement and the company has complied, Tesla spokesman Dave Arnold said. Tesla had not ‘received a subpoena, a request for testimony, or any other formal process,’ Arnold said. ‘We respect the DOJ’s desire to get information about this and believe that the matter should be quickly resolved as they review the information they have received.’
"It is unclear how advanced the investigation is, and there’s no guarantee the probe will lead to any criminal charges or other enforcement action. But a person familiar with the investigation said it is a fraud probe seeking to determine whether Musk’s statements were meant to mislead investors.”
— Women at startups get less equity. WSJ's Yoree Koh: “Female employees at startups typically get less than half the amount of equity of their male peers, according to a new study, highlighting one factor that has limited women’s involvement in the Silicon Valley wealth-generating machine. Female employees own 47 cents for every dollar of equity a male employee owns, according to a new study... The equity discrepancy is even more stark for female founders: Women founders own 39 cents of every dollar of equity a male founder owns.”
— Facebook faces complaint over job offers. The Post's Elizabeth Dwoskin: “Three female job hunters, a large worker coalition and the American Civil Liberties Union lodged a legal complaint against Facebook on Tuesday, accusing the company of enabling discriminatory job postings with its ad-targeting tools. The complaint also targets 10 employers that used Facebook to post job ads — for roles as police officers, truck drivers and sales representatives at a sports store — that were exclusively targeted to men, according to images of ads in the complaint. The complaint with the federal Equal Employment Opportunity Commission is the latest of several legal efforts that take aim at Facebook’s core business of targeting advertising to highly tailored groups of consumers, a model that earned the company over $13 billion in revenue last quarter.”

Danske Bank's chief executive Thomas Borgen quit on Wednesday following an investigation into payments totaling some $234 billion through its Estonian branch, many of which the Danish bank said were suspicious.
Reuters

At least 10 McDonald's employees have filed charges against the company, according to Fight for $15. Support from the Time's Up Legal Defense Fund has helped pay for their legal fees.
CNBC

The decision by the Salesforce chief executive Marc Benioff to buy Time magazine raises the question of the duty that executives have to the companies that made them rich.
NYT
MONEY ON THE HILL

Trump speaks during a June meeting with Republicans including Sen. Richard Shelby (R-Ala.), left — one of the leaders of the Senate effort to avert a government shutdown — and Rep. Rodney Frelinghuysen (R-N.J.). (Kevin Lamarque/Reuters)
Senate passes spending bill. The Post's Erica Werner: "The Senate on Tuesday passed a short-term spending bill that would keep the government running through Dec. 7, aiming to avert a government shutdown and put off a fight over funding for President Trump’s border wall until after the midterm elections. The short-term bill came attached to a massive budget package containing full-year 2019 funding for the Pentagon as well as for the Labor, Education and Health and Human Services departments. GOP leaders designed the package to combine key Republican and Democratic priorities in an attempt to garner overwhelming bipartisan support. The package also aims to satisfy Trump’s desire for more military spending."
THE REGULATORS
Visa, Mastercard gear up for next fight after swipe-fee settlement. Bloomberg: "A record $6.2 billion settlement won’t be enough to end Visa and Mastercard’s long-running feud with the U.S.’s biggest retailers. In the largest-ever class-action settlement of a U.S. antitrust case, Visa Inc.and Mastercard Inc. agreed to pay between $5.54 billion and $6.24 billion to a class of more than 12 million merchants who accept the payment networks’ cards, according to a regulatory filing on Tuesday. The total is in line with sums the companies previously set aside to cover the costs of the litigation.
"But retailers are gearing up for the next round in their fight with the world’s biggest payment networks. Tuesday’s settlement addresses only monetary damages associated with the lawsuit. There’s a separate class of merchants fighting for changes to Visa and Mastercard’s business practices."
DAYBOOK
Coming soon
THE FUNNIES
From The Post's Tom Toles: “Is Trump now toying with global prosperity?”

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