Many market observers were caught by surprise after President Trump continued down a path of escalating trade tensions late July 10.
By Kris Rosemann
As with many developments surrounding the Chinese (FXI, MCHI) economy, metals have found themselves at the fore of the discussion. After the Trump Administration threatened additional 10% tariffs on $200 billion in Chinese imports July 10, copper (COPX) and other metals prices plunged as the newest list of targeted goods includes manufacturing export industries, electronics, textiles, metal components, and auto parts. It is worth noting that the US imports far more Chinese goods than vice versa, suggesting China would not be able to match US tariffs dollar-for-dollar if a full-on trade war ensues, though such a scenario is not a best-case outcome for either side.
Though volatile in the first half of 2018, due in part to ongoing trade concerns, copper prices had risen considerably since early 2016, thanks in part to expectations of rising demand from autonomous vehicles. However, demand concerns are cropping up alongside more tariff talk from the Trump administration as the resulting price hikes are expected to ultimately be passed on to consumers, which has the potential to mitigate previously anticipated demand increases in the near term. Metal-heavy consumer products such as cars and air conditioners are prime examples of such a shift, and China is a key buyer of most industrial metals. Producers up and down the supply chain are likely to feel the impact of rising input costs and/or falling demand as a result.
Textile stocks also faced pressure on the news of potential new tariffs, as have semiconductor stocks as Chinese products from TV parts to refrigerators may be included in the proposed next round of tariffs. Trump’s actions may be little more than political posturing among his voter base, which generally appears to support his ‘America First’ agenda on the surface, a driver that may change quickly should consumer prices experience a material inflection upward. Political considerations cannot be ignored as US mid-term elections near.
Many multinational corporations are also likely to delay major investments until the dust settles, yet another potentially negative externality of the Trump administrations actions. Comments from SoftBank (SFTBY) officials may not have mitigated this concern, but rather highlight the somewhat selective impact of the tariffs as the company remains confident that its global investments in next-generation technology such as artificial intelligence, the Internet of Things, and robotics are unlikely to be impacted by the trade war. We’re not ruling anything out at this juncture in a wildly unpredictable space driven by political issues.
Next-generation technology may not be entirely unaffected by the escalating trade war as some of the semiconductors stocks facing selling pressure, including simulated newsletter portfolios idea Intel (INTC), are tied in part to some of the aforementioned technology. Even if such technology is not directly impacted by the growing list of tariffs, the overall profit pool of semiconductors is a reasonably important consideration as it relates to the ongoing development of other parts of their portfolios. Chinese tech stocks listed on US exchanges, such as Alibaba (BABA) and JD.com (JD), are also facing selling pressure as the possibility for tariffs on a growing range of tech products grows higher with each report of the Trump administration’s desire for additional trade-restricting policies.
Auto manufacturers have already been at the fore of the tariff developments, though through US-EU trade disputes. Harley Davidson (HOG) found itself caught in Trump’s crosshairs after it announced plans to shift production to Europe in response to the trade dispute. The motorcycle maker estimates that tariffs will add ~$2,200 on average to the cost of motorcycles produced in the US and exported to the EU and could cost the company $90-$100 million in 2018 alone. The production shift to Europe will require material investments and is a prime example of the fallout consumers might expect to see as developments unfold, though shifting production to China is admittedly a more difficult proposition for US companies than moving manufacturing to Europe.
The crude oil market (OIL, USO) is yet another area of sensitivity following the new tariff talks as an impact on overall global demand growth is a possibility. China is the second largest importer of US crude, but oil has yet to be a target area in Beijing’s retaliatory procedures. Also impacting the price of crude of late is the EIA reiterating its opinion that the US will continue to play an increasingly important role in the global supply of the black liquid as the EIA released a forecast estimated the US will average 12 million barrels of production per day in 2019, which would make the country the world’s leading producer. Nevertheless, potential logistical issues in the Permian Basin, perhaps the most important regions of US oil production, have the potential to impact this forecast and are worth monitoring. Potential production increases from the likes of Saudi Arabia and Libya are impacting outlooks as well.
Though we do not disagree with SoftBank’s position that certain areas of global investments may not be impacted by escalating trade tensions, global economic growth in general does not benefit from growing trade restrictions among the world’s largest economies. This has been clearly reflected in the volatility in equity markets on repeated news of potentially increased tariffs among major global players, and we fully expect such volatility to persist as trade posturing continues on a significant scale.
Auto Parts: ALSN, ALV, AXL, BWA, CVR, CTB, DAN, DLPH, GNTX, GT, JCI, LEA, LKQ, MGA, SUP, TEN, WAB
Metals & Mining – Aluminum: AA, ACH, ATI, CENX, KALU
Metals & Mining – Diversified: AG, BHP, CLF, FCX, RIO, SCCO, VALE, WPM
Metals & Mining – Gold: ABX, AUY, EGO, GG, KGC, NEM
Metals & Mining – Steel: AKS, GGB, MT, NUE, PKX, STLD, X
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Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.