On Friday, we had positive news on trade related to delaying tariffs on European auto imports and eliminating steel and aluminum tariffs for Mexico and Canada. All good news — but a funny thing happened: the markets didn't move much. In fact, they drifted lower toward the close on word that trade negotiations with China were in flux.
With the mostly flat for the week, trade related names were far and away the worst performers — Caterpillar, Apple, 3M, and Intel all down 2 to 6%.
"After all these trade disappointments it's getting to be a tougher sell," Alec Young, Managing Director, Global Markets Research at FTSE Russell. "China is still out there, and the market knows that is a tough nut, and traders want assurances that no new tariffs are coming on."
What's going on?
Traders are concerned there is another shoe to drop: more retaliatory measures from China, which may or may not come in the form of tariffs. Chinese media outlets have been warning all week they are coming.
What other form would retaliation take? It wouldn't be hard to imagine. China has already cancelled a large pork order. It could come in the form of regulatory harassment of U.S. corporations operating in China, but it could be even simpler.
Jim Kelleher at Argus tells his clients to watch for sudden announcement of loss of business: "We would be careful to monitor investments in U.S. 'champion' names such as Boeing and Caterpillar. Should the trade environment between the U.S. and China deteriorate further, Chinese officials could directly or indirectly discourage Chinese companies and consumers from doing business with high-profile symbols of U.S. corporate might."
Kelleher also warns against simply using a dollars and cents approach to trade: "Trade can be about more than dollar amounts. Business is a delicate mix of activity and sentiment; deterioration in sentiment can have an outsized effect on activity. Moreover, global supply chains have become complicated and entangled among nations. Counting the dollar value of car parts, for example, does not capture how those delayed or absent parts may impact the production of an entire vehicle."
President Trump, presumably, is well aware of this, but Chris Krueger at Cowen notes that his efforts to shield farmers from the pain felt by retaliatory tariffs may be skewing his thinking: "The most important takeaway (from our perspective) is that anything that insulates Trump's base from the near term costs of his actions raises the likelihood we continue on the tariff path."