Image Source: John Karakatsanis
The arrest of a high profile Chinese tech executive has renewed concerns over trade tensions after the US markets were closed for a day of remembrance for the 41st President of the US. Also, the Fed released its Beige Book.
By Kris Rosemann
Despite the markets being closed December 5 in remembrance of the passing of George H.W. Bush, the 41st President of the US, investors continue to be pulled in different directions regarding the state of US-China trade negotiations, and the situation continues to become more muddled.
After a weekend of optimism, a new round of doubt was cast over the legitimacy of the progress made at the G20 Summit, but China’s (FXI) commerce ministry offered comments of confidence following the sizable sell-off in US markets December 4 that a trade agreement could be reached within 90 days. China is reportedly preparing to begin importing US soybeans and liquefied natural gas in the first show of validation that the weekend optimism was not all for naught, and reports also suggested US crude shipments to China could begin before March. Chinese tariffs on US soy had its intended impact as imports fell 95% in the month of October from the year-ago period, a drop that came in the midst of the Midwest harvest season in the US.
However, that move of good faith may very well be at risk as Huawei Technologies’, a company that recently overtook Apple (AAPL) as the number two global smartphone supplier with 52.2 million shipped in the third quarter of 2018, CFO Wanzhou Meng (also deputy chairwoman and daughter of the company’s founder) may be extradited to the US after being arrested December 1 in Canada (EWC) over potential violations of US sanctions on Iran. The Chinese embassy in Canada has called for the US and Canada “rectify wrongdoings” and free Meng, but if the allegations are as serious as they appear, a clean resolution to China’s liking may not be on the immediate horizon.
Huawei, which is now widely regarded as China’s most globally renown tech company with operations across Asia, Europe, and Africa, and fellow Chinese telecom giant ZTE Corp, which had previously been banned in the US for violating sanctions against North Korea and Iran, have been in the midst of discussions regarding Chinese intellectual property practices, a notably contentious point in trade discussions.
5G wireless technology standards have been a focal point in the IP dispute and a focus for the US and allies to slow Chinese influence. In 2016, US officials warned consumers of the potential for Chinese telecom companies to use back doors to monitor user activity, and Best Buy (BBY) recently stopped selling Huawei’s products. The company’s products are also banned for use by the US government and government contractors due to spying concerns. Australia (EWU) and New Zealand have both banned Huawei’s equipment for 5G wireless networks due to national security concerns, and the US is working on persuading other major allies to do the same.
We’re expecting the situation to further complicate the tenuous relationship between two global superpowers, and the heightened risk to a clean resolution of global trade strains, which directly and meaningfully impact expectations of global economic growth, may very well prove to continue some key themes from the December 4 sell-off, “What’s Weighing on the Markets.” After the news broke, equities across Asia faced broad-based selling pressure, as did US futures, echoing the sentiment expressed above regarding the potential for the news to have a meaningful impact on trade negotiations.
Meanwhile, in the US, the release of the Fed’s Beige Book renewed debate over the future pace of US economic growth as some of the 12 reporting districts reported waning optimism amid uncertainty from the impact of tariffs, rising interest rates, and a tight labor market. The impact of tariff-related price increases has spread from the manufacturing sector to restaurants and retailers, and rising transportation costs are becoming a concern for an increasing number of companies as nearly all of the districts reported input costs rising faster than final goods prices, a trend we’re keeping an eye on as we begin to approach the lapping of the benefit from tax reform as it relates to the health of bottom-line performance for a wide range of companies.
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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.