Markets in Freefall as Trump Orders American Companies out of China

Aug 23, 2019
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Things are heating up in the US – China trade war today as President Trump went on the twitter warpath with a series of tweets ordering American companies to “start looking for an alternative to China”. The tweets in full below:

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It’s a remarkable series of quotes in response to the latest Chinese retaliation (raising tariffs on the US) to Trump’s latest round of tariffs. Phew! This comes hot on the heels of other major economic action in the shape of the earlier Trump tweet asking whether the bigger enemy was with the options being his own hand-picked Federal Reserve Chair Jerome Powell or Chairman Xi!

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This was due to Trump’s dissatisfaction with Powell’s lack of hints about further interest rate cuts, although some are speculating that the President didn’t realise the Powell Speech today wasn’t a policy speech on rates, but a speech which happens annually separate from the FOMC. Readers may remember that the Fed just cut rates by 25 basis points (0.25%) which resulted in the President calling for a 100 basis point cut shortly after!

Immediate reaction has been widespread and all negative. Every major market sector is collapsing with technology being the hardest hit. The S&P 500, Dow Jones Industrial Average and Nasdaq Composite are all down over 2% while the SOX Semiconductor index is down over 4%. Pretty much anything with exposure to China, whether via manufacturing, rare earths, consumption, some combination of the above or other factors is being hit and the market is now pricing in better than even money on 75 basis points of Fed rate cuts for the rest of the year. Throw in another US bond yield curve inversion and we’re looking at a lot of frazzled investor nerves as we head into the closing bell of the US market for the week.

The President has said that he will respond to China’s latest tariffs later today and we’ll wait to see what comes next.

Tech Bears Brunt of Hit

As we know, technology stocks have been suffering a lot from the trade war given the number of partnerships, supply lines, assemblers and consumers of technology all converge on China. Chip stocks in particular have been hit as usual with Intel (NASDAQ:INTC), NVIDIA (NASDAQ:NVDA) and AMD (NASDAQ:AMD), Broadcom (NASDAQ:AVGO) and Qualcomm (NASDAQ:QCOM) all massively down.

Everybody is on eggshells and nobody really wants to be long heading into a weekend with massive unknowns as to how the President is going to retaliate and what China may do over the weekend with the possibility of devaluing the Yuan again.

Non-chip tech companies are also suffering with Apple (NASDAQ:AAPL), Tesla (NASDAQ:TSLA), Activision Blizzard (NASDAQ:ATVI), Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) all down over 3% too.

Breaking Down the Action

Ordering American companies to “seek alternatives to China” is a tricky thing. Technically, the President obviously doesn’t have the power to order private companies to move international subsidiaries or operations out of a country but at the same time, there are significant levers the President can have to make life harder for companies which choose to ignore him.

Concerns are also being raised as to whether the President could direct the Treasury to intervene in currency markets to attempt to weaken the US Dollar and the Greenback has moved a bit lower in anticipation of possible intervention here. It would be difficult to intervene in currency markets though given the US only has about $70 billion of firepower with which to do this and that’s nothing in relation to currency trading which sees about $5 trillion in transactions every day.

Also under the guise of stopping fentanyl imports from China, the President is again ordering all carriers like Fed Ex, Amazon, UPS and the Post Office to search for and refuse all fentanyl deliveries from China. Again, ordering private companies how to operate their business is a tricky subject and while fentanyl labs in China shipping to the US is a problem, it is also likely that this is aimed at slowing down goods shipments from China to the US.

Exactly what will happen next is unclear. Tariffs have been the go to action in the trade war thus far but the feeling is that additional action is on the way. If this is the case, whether via shipping inspections, currency interventions, WTO complaints, or even some form of economic sanctions broader than single company blacklists is unclear. Keep it tuned here while we follow the action.

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