Since the U.S. election in November 2016, equity markets have enjoyed the “Trump Bump” or Trump rally, predicated on hopes that Trump’s policies of deregulation and tax cuts would spur economic growth.
In any case, markets were also in a bubble caused by central bank money printing programs, so Trump served as a good excuse for equity traders to add another layer to the rally.
This week President Trump is also getting tagged as the reason for the sharp equity sell-off. Trump signed into law this week new tariffs on $50 billion of Chinese imports and pledged there’s more on the way.
“This has been long in the making,” Trump said signing the intellectual-property order, adding that the tariffs could affect as much as $60 billion in goods. “This is the first of many.”
On Friday, in response, China unveiled tariffs on $3 billion of U.S. imports of U.S. pork, recycled aluminum, steel pipes, fruit and wine. Suppliers to Apple Inc. were among the hardest hit in Hong Kong and mainland markets on Friday, as investors focused on potential losers from the trade spat.
Normally, the diverse provenance of earnings in U.S. megacaps is seen as a shield against the vicissitudes of the domestic economy. Inconveniently for Trump, who for 15 months has touted equities as a report card on his policies, it also leaves them particularly exposed to anxiety over trade.
What companies are most at risk of a trade war with China? Here is a list of products most exposed to trade tariffs and other actions China may take.
Aircraft
Chinese media have mentioned Boeing Co. as a key target in a trade war. President Xi Jinping gave Boeing a $38 billion order on a 2015 plant visit in Seattle, and China could retaliate by canceling those orders and shifting to Airbus, for example. There’s also the government procurement market, which China says is worth 3.1 trillion yuan ($490 billion). This is one option because China isn’t a signatory to the World Trade Organization’s rules on government procurement.
Agriculture
Farming is on the forefront of any trade war as it’s one of the few sectors where U.S. exporters run a surplus with China. China’s the biggest buyer of U.S. soybeans, taking $14.6 billion worth in the last marketing year — more than a third of the entire crop. Sorghum is also said to be on the hit list.
Tech
While the genesis of the latest U.S. measures against China are meant to protect American intellectual property and technology, that doesn’t mean Silicon Valley will be shielded from the crossfire. Apple Inc., Intel Corp. and Cisco Systems Inc. are among those vulnerable to a backlash.
Export Taxes
Another option is for China to impose special additional duties on locally made products exported to the U.S. Companies like Apple and other consumer goods and electronics giants would suffer if China imposes a duty on exported products. Such a move would hit U.S. companies and consumers hard, though it would also hurt Chinese firms.
Services/Education
The U.S. recorded a $38 billion services trade surplus with China in 2016. Some of the leading services exports from the U.S. to China include travel; IP, such as trademarks; and computer software, according to the U.S. Trade Representative’s Office. China could also restrict the number of students who go to U.S. universities.
Transactional diplomacy
China can quickly throw up non-tariff obstacles to trade, stepping up safety inspections and delaying paperwork essential for goods to make it into the country. It’s an under-the-radar approach China has often used to advance its geopolitical goals in Asia. They can also disrupt the operations of U.S. multinationals in China. That could include anything from actions by customs officials, financial regulators, quality inspectors, antitrust bodies, environmental authorities, consumer groups or economic planning bodies.
Yuan
The nuclear option would be a deliberate devaluation of the yuan to make China’s exports more competitive. Such a move would send shock waves through global markets, which is probably why it’s not an immediate lever that Beijing wants to pull.
Technical Outlook
After what is shaping up to be a major down week on U.S. indexes (as of Friday pre-market), it would seem that, barring a surprise turnaround, U.S. indexes are going to make new lows in the coming days. An intermediate dead cat bounce may or may not occur. As long as the bounce remains below 2700 on the S&P 500, we’d use it as a shorting opportunity. Our Dow Jones chart below shows that the pennant was indeed broken to the downside. Using the height of the pennant, we project the Dow’s minimum target is 21,000.
Stay safe.
