What trade war? Investors on Monday continued shrugging off fears that President Trump's escalation of trade hostilities will put a dent in share prices.
Indeed, on just the second trading day since the United States and China each slapped tariffs on $34 billion of imports from the other, the Dow Jones industrial average recorded its best day in a month. The index leaped 1.3 percent, turning positive for the year and beating its 50-day moving average for the first time in three weeks. It was the Dow’s third higher close in a row.
The performance suggests that trade jitters, which have stalked a shaky stock market all year, won’t easily overwhelm a focus on solid economic fundamentals. The underlying strength of the economy was on display in Friday's stronger-than-expected jobs report, with 213,000 jobs added in June along with upward revisions for April and May. Investors expect the good news will continue rolling in as the second-quarter earnings season kicks into gear.
Market watchers say investors aren't ignoring the threats posed by Trump’s budding trade fights. Rather, most are assessing that the Trump administration is still just maneuvering for leverage and won’t follow through with the full raft of tariffs the president has threatened.
“On balance, it’s a reason to be less positive,” says Ed Clissold, chief U.S. strategist at Ned Davis Research. “But at the end of the day, do we think this is going to turn into a major trade war that’s going to cause a major recession? That doesn’t appear to be the case. Part of our thesis is that President Trump’s negotiating style has been to start with a strong position.”
More Trump-driven uncertainty is on tap when the president heads to Brussels for a NATO summit meeting that starts Wednesday. He will then go to London to meet Brexit-addled Prime Minister Theresa May, then on to Helsinki to huddle with Russian President Vladimir Putin. Trump linked his trade dispute with the European Union to his gripes about the military alliance in a pair of tweets on Monday morning:
The United States is spending far more on NATO than any other Country. This is not fair, nor is it acceptable. While these countries have been increasing their contributions since I took office, they must do much more. Germany is at 1%, the U.S. is at 4%, and NATO benefits.......— Donald J. Trump (@realDonaldTrump) July 9, 2018
...Europe far more than it does the U.S. By some accounts, the U.S. is paying for 90% of NATO, with many countries nowhere close to their 2% commitment. On top of this the European Union has a Trade Surplus of $151 Million with the U.S., with big Trade Barriers on U.S. goods. NO!— Donald J. Trump (@realDonaldTrump) July 9, 2018
And again early today:
Getting ready to leave for Europe. First meeting - NATO. The U.S. is spending many times more than any other country in order to protect them. Not fair to the U.S. taxpayer. On top of that we lose $151 Billion on Trade with the European Union. Charge us big Tariffs (& Barriers)!— Donald J. Trump (@realDonaldTrump) July 10, 2018
But slowing global growth should keep a lid on trade tensions, says Brian Belski, chief investment strategist at BMO Capital Markets. That, he said, is because other trading partners can’t afford to become the aggressors in a trade showdown with the U.S. “We believe other countries won’t take the lead because it would be more debilitating to their economies,” he says. And Trump, meanwhile, is simply “trying to force a reversion to the mean” by lowering trade barriers abroad. “It’s our view that there’s an excessively low likelihood the president will enforce all the tariffs he’s talking about.” (See The Washington Post’s tariff tracker here for a tally of how the levies now in force on $85 billion worth of imports compares to those that Trump has threatened.)
“We understand that the trade war is producing lots of collateral damage in specific sectors – to soybean farmers in the Midwest, and U.S. manufacturers who are dealing with supply chain disruptions and higher costs,” Horizon Investments chief global strategist Greg Valliere wrote in a Monday note. “We also understand that the trade war could get much more serious if Trump carries out his threat to impose massive new auto tariffs or blockbuster new tariffs against China. Yes, this could get worse before it gets better, but for now the financial markets – especially in the U.S. – are focusing on earnings and interest rates, both of which look just fine despite the global uncertainties.”
The recent run-up in small-cap stocks, which have lower exposure to trade, suggests some investors are looking for a haven in the event the conflict intensifies, as The Wall Street Journal notes: “The S&P Small Cap 600 is up 13% on the year, while the S&P 500 is up 4.1%.”
But in the feedback loop between a stock market and a White House that each keep a keen eye on the other, investors’ relative steadiness could send the wrong message to the administration.
Commerce Secretary Wilbur Ross insisted last week that the Trump team won’t balk from its trade push in the event of a steep stock sell-off. Yet two weeks ago, as trade fears dragged the Dow below its 200-day moving average for the first time since the Brexit vote, White House trade czar Peter Navarro turned up on CNBC to offer reassurances that prompted a late-session rally.
Now, investors are betting Trump’s trade volleys will amount to more talk than action; doing so, they risk giving the president a green light to press forward with tariffs that rattle more than markets.
|You are reading The Finance 202, our must-read tipsheet on where Wall Street meets Washington.|
|Not a regular subscriber?|
— President Trump last night tapped federal judge Brett M. Kavanaugh, 53, to replace retiring Supreme Court Justice Anthony M. Kennedy (Kavanaugh is a former Kennedy clerk, but is expected, if confirmed, to be decidedly to the right of his predecessor). "Kavanaugh impressed Trump with his polished presentation, Ivy League credentials and the assurance from confidants inside and outside the White House that Kavanaugh’s legal writings were proof that he would not drift to the left over the years, an anxiety on the right during court openings shared not only by the president but by many GOP leaders," report Robert Costa, Robert Barnes and Felicia Sonmez. "For Trump, Kavanaugh was someone in the [Neil] Gorsuch mold, White House officials said, and the president was keen to have his second court pick garner a similar wave of praise from Republicans."
- Bob, the Post's Supreme Court beat writer, explains how Kavanaugh would "step, not lurch" rightward.
- And Anne E. Marimow details how the judge, who serves on the U.S. court of appeals for the D.C. Circuit, has "endorsed robust views of presidential powers."
— Kavanaugh also targeted the CFPB. Politico: “Kavanaugh delivered a huge victory to conservatives in October 2016 when he wrote an opinion declaring the structure of the Consumer Financial Protection Bureau... to be unconstitutional. Writing for a three-judge panel, Kavanaugh said the 2010 Dodd-Frank law had wrongly placed 'enormous executive power' in the CFPB’s single director, which Republicans and the banking industry want to replace with a multi-member commission. Supporters of the CFPB accused Kavanaugh of acting as a partisan activist, and the constitutionality of the CFPB's structure was later upheld.”
— The trade war is getting all the attention during earnings season. Bloomberg News's Luke Kawa and Sid Verma: “Earnings season might be the star of the show, but investors are increasingly worried about the supporting cast. 'There are a lot of different themes competing for our attention,' according to Peter Tchir, head of macro strategy at Academy Securities. 'From solid U.S. growth, to Europe getting its act together, to Chinese and U.S. currency moves, to the implications of trade wars with China and with the rest of the world, to the Fed, to midterm elections, to, well, you get the point,' he wrote. As earnings season unfolds, clarity on these fronts will help Wall Street gauge whether the near-decade long rally in U.S. risk assets is heading for an Indian summer — or in its autumn years.”
— Rising wages may put profits under pressure. The Wall Street Journal's Danielle Chemtob: “Rising wages are beginning to eat into the profits of some U.S. companies. Businesses from dollar stores to hotel operators to fast-food chains have warned in recent months that higher labor costs have been a drag on their profits — a potential headwind for the nine-year stock-market rally as it struggles for momentum ahead of the second-quarter earnings season. Average hourly earnings increased 2.7% in June from a year earlier, according to the Labor Department’s monthly jobs data released Friday. Although that is below the 2.8% economists expected, wages have risen at least 2.5% for 16 of the past 17 months, a faster pace than recorded earlier in the economic expansion.”
— May survives, for now. Bloomberg's Robert Hutton and Tim Ross: "Theresa May looked likely to survive any attempt to remove her as U.K. prime minister over her Brexit strategy. But furious lawmakers warned that she could split her Conservative Party trying to get her plan through Parliament. Despite the resignations of two of her most senior ministers in one day -- an event without parallel in recent decades -- most of her Conservatives appeared content on Monday evening with a proposal that would keep Britain close to the European Union on trade and regulations... With May looking at a busy week -- a NATO summit and hosting Donald Trump -- she is not out of danger yet. A handful of lawmakers who want a clean break from the EU said privately they had submitted letters calling for a vote of confidence in May, though they hadn’t met the threshold of 48 needed to trigger such a ballot.
— China and Germany strengthen trade bond. Reuters's Thomas Escritt and Michelle Martin: “Germany and China signed a raft of commercial accords worth some 20 billion euros ($23.5 billion) on Monday, with their leaders reiterating commitments to a multilateral global trade order despite a looming trade war with the United States. The deals, involving German industrial giants including Siemens... Volkswagen... and BASF... come with the two leading exporting powerhouses being forced into an unlikely alliance in defense of the open global trade on which both their economies depend. Speaking at a news conference alongside Chinese Premier Li Keqiang, Chancellor Angela Merkel said: 'We both want to sustain the system of World Trade Organization rules.'”
BMW expands in China. Bloomberg News's Oliver Sachgau: “BMW AG is increasing manufacturing capacity in China in a move that will help the automaker lower its reliance on imports from a U.S. factory just as trade tensions between the two countries intensify. BMW and Chinese partner Brilliance Automotive Group Holdings signed an agreement Monday to expand their joint venture BMW Brilliance Automotive, the German company said in a press release. The deal will boost the number of cars they produce annually at two facilities in China to 520,000 in 2019.”
— Chinese exporters are feeling it. The Associated Press's Joe McDonald: “Chinese exporters were scrambling Monday to cope with a plunge in U.S. sales while China’s state press shrugged off the impact of Washington’s tariff hikes in a spiraling technology dispute. The impact of Friday’s tariff hikes on the world’s second-largest economy should be limited, according to private sector analysts. But . . . Trump’s measures targeting Chinese medical, construction and factory equipment hit exporters that say price-conscious American customers have stopped buying. . . . The state press tried to downplay the impact on China, emphasizing what Beijing says will be the bigger blow to American consumers who will pay more for Chinese goods.”
China's hooked on American soybeans. The New York Times's Raymond Zhong: “Beijing placed a 25 percent tariff on American soybeans last week in retaliation for the Trump administration’s levies on Chinese-made goods. Last year, soy growers in the United States sold nearly one-third of their harvest to China. In dollar terms, only airplanes are a more significant American export to China, the world’s second-largest economy. Still, soy-producing states like Iowa and Illinois might not feel the tariffs’ impact right away. China buys so much soy from the United States — $14 billion last year — that it can hardly switch to new suppliers overnight. Foreign-grown soybeans are a key source both of low-cost protein for feeding livestock and of cooking oil for Chinese kitchens. China is pressing its own farmers to grow more. But the math is daunting, and the obstacles are formidable.”
But the country has options for striking back. AP's McDonald: “In his trade war with China . . . Trump wields one seeming advantage: The United States could ultimately slap tariffs on more than $500 billion in imported Chinese goods. Beijing has much less to tax: It imported just $130 billion in U.S. goods last year. Yet that hardly means China would be powerless to fight back once it ran out of U.S. goods to penalize. It possesses a range of other weapons with which to inflict pain on the U.S. economy. Indeed, China’s Commerce Ministry has warned of 'comprehensive measures' it could take against the United States — from harassing automakers, retailers or other American companies that depend on China to drive revenue to selling U.S. government debt or disrupting diplomatic efforts over North Korea.”
Tesla gets pinched. Reuters's Vibhuti Sharma: “Tesla Inc... has raised prices on its Model X and S cars by more than $20,000 in China, automotive news website Electrek reported on Monday, making it one of the first U.S. carmakers to hike prices in the wake of rising trade tensions. ... Tesla has been banking heavily on China, the world’s largest automotive market, to boost sales of its electric cars and has plans to build a factory in the country. ... 'Raising prices is going to hurt sales, but money losing Tesla has to raise prices because they can’t afford to fully absorb to the higher costs of tariff,' CFRA research analyst Efraim Levy said.”
Not making history. The Washington Post's Heather Long: "As the United States and China hit each other with hefty tariffs on Friday, China's Ministry of Commerce put out a statement saying that President Trump had just 'launched the largest trade war in economic history.' It's a bold claim, but it's not backed up by the facts. The current trade war is ugly, but so far it's nowhere near the 'largest in history.' That title belongs to the trade war the United States launched in the 1930s, according to Douglas Irwin, an economics professor at Dartmouth, and Chad Bown, a senior fellow at the Peterson Institute for International Economics."
— Trump chides Pfizer. The Post's Damian Paletta: “Trump on Monday said Pfizer and other pharmaceutical companies 'should be ashamed' of themselves for raising drug prices and vowed a government response, just two months after saying he had put forward a plan to 'derail the gravy train.' Trump’s comments, which came in a Twitter post, appeared to be in response to a Financial Times report that showed that Pfizer had raised prices on roughly 100 drugs. Trump had promised to lower drug prices as part of his 2016 campaign, and he threatened to use the government’s clout to negotiate lower prices. But he opted against taking this step earlier this year, opting instead to release multiple ideas in a 44-page document that his advisers argued could eventually lower prices if implemented.”
Pfizer & others should be ashamed that they have raised drug prices for no reason. They are merely taking advantage of the poor & others unable to defend themselves, while at the same time giving bargain basement prices to other countries in Europe & elsewhere. We will respond!— Donald J. Trump (@realDonaldTrump) July 9, 2018
— Wilbur Ross reveals another stock sale. The Post's Steven Mufson: “Commerce Secretary Wilbur Ross last week disclosed a tardy sale of stock he had pledged to divest, saying he had overlooked the shares because they were held in a separate account. Ross told the Office of Government Ethics that on June 11 he sold 1,631 shares of Air Lease Corp. worth between $50,000 and $100,000. Air Lease is a leading commercial aircraft leasing company with more than 300 aircraft. Ross was a director of Air Lease from 2010 through 2013, and he obtained the shares as part of a stock plan for directors of the company. But the shares were under the name Wilbur L. Ross, whereas the others were listed without his middle initial, Ross said. As a result, he said he had overlooked them until he received a check for less than $200 in dividend payments that had gone unclaimed.”
— Trump's Supreme Court nominee has shown wariness of regulations. MarketWatch's Jeffry Bartash: “Trump on Monday night picked Brett Kavanaugh to fill an open seat on the Supreme Court, potentially creating the most business-friendly high court since before the New Deal in the 1930s. The nomination of Kavanaugh to replace the retiring Anthony Kennedy is another win for corporate America. The court has issued a string of rulings in recent years favorable to business interests and Kavanaugh could help cement the strongest pro-business leanings on the court in decades. Notably, Kavanaugh has been critical of the expanding powers of federal agencies to issue new regulations, a source of chronic complaints by big and small businesses alike.”
— The White House highlights Kavanaugh's economic stance. Politico's Lorraine Woellert: “The White House on Monday immediately played up... Kavanaugh’s pro-business, anti-regulation record and is asking industry trade groups for help pushing his confirmation through the Senate. As... Trump introduced the nominee during a Monday evening ceremony, the White House was touting Kavanaugh’s record battling 'overregulation' in a document sent to industry stakeholders. 'Judge Kavanaugh protects American businesses from illegal job-killing regulation,' the White House wrote in an email delivered just after 9 p.m.”
— Giuliani walks backward to not totally rule out a Mueller interview for Trump. Bloomberg News's Terrence Dopp: “Rudy Giuliani said his client . Trump, is willing to answer 'narrow' questions from Special Counsel Robert Mueller in his probe of Russian interference in the 2016 election, provided they have assurances the investigation is drawing near a close. 'If they had some narrow questions about collusion where they’re confused about — did he find out something, did he know something, did he talk to anyone? — we’d be happy to give them answers to that so long as we knew they are concluding it,' Giuliani said Monday in an appearance on Fox News.”
— McKinsey ends ICE work. NYT's Michael Forsythe and Walt Bogdanich: "McKinsey & Company, the prominent management consultancy, has stopped working for Immigration and Customs Enforcement after the disclosure last month that the firm had done more than $20 million in consulting work for the agency. The revelation prompted questions from employees at the firm. McKinsey’s decision was conveyed in a note from the firm’s new managing partner, Kevin Sneader, to former employees. He said the contract, which was not widely known within the company until The New York Times reported it in June, had 'rightly raised' concerns."
— Uber invests in scooters. NYT's Daisuke Wakabayashi: “The ride-hailing company has made investments to prepare for the future of flying taxis. It acquired Jump, an electric bicycle company, for around $200 million this year. And on Monday, Uber said it had cut another check to invest in Lime, a company best known for offering rides on motorized scooters. As part of a $335 million fund-raising round that values Lime at $1.1 billion, the start-up said it was accepting a “sizable” investment from Uber and would team up with the company. Uber said it would show Lime scooters as an option within its mobile app and put its logo on some Lime scooters. Neither Uber nor Lime disclosed the exact size of Uber’s investment.”
— Big banks shake up their lobbying. Politico's Zachary Warmbrodt: "The nation's biggest banks, struggling to win over policymakers even in the business-friendly Trump era, are poised for a major makeover of their Washington lobbying efforts. JPMorgan Chase, Bank of America and Wells Fargo are among the megabanks seeking to rejuvenate their image — still tarred by the financial crisis and a series of scandals — by rebranding and expanding their trade groups...
"In an attempt to strengthen their influence, the banks this month are launching the Bank Policy Institute, a union of two existing trade groups that have long represented large lenders in Washington — the Financial Services Roundtable and the Clearing House Association. The group has recruited a top Trump economic adviser, Shahira Knight, to serve as executive vice president and head of public affairs. The new organization will speak for global banks based in the U.S. as well as lenders with a more regional focus. The tie-up may have its own growing pains, thanks to skepticism on the part of smaller members about the control the megabanks will exert over the new organization."
— House Republican introduces bill to clip Trump's trade powers. The Hill: "Rep. Mike Gallagher (R-Wis.) is slated to introduce a bill on Monday that would limit... Trump's authority to impose certain tariffs. Under the legislation, the president would be required to obtain congressional approval before levying tariffs 'in the interest of national security.' Lawmakers would be provided with a 60-day window to review the president's proposals. Legislation aimed at approving the requests would also have the ability to be fast-tracked through both chambers, ensuring an opportunity for debate and passage."
— States launch fast-food hiring probe. The Post's Jeff Stein: "Attorneys general in 10 states and the District of Columbia are launching an investigation of contracts at fast-food chains that prevent their workers from switching franchises, targeting a practice some economists say drags down wages for millions of Americans. The group will send letters to eight fast-food companies — including Burger King, Dunkin’ Donuts, Panera Bread and Wendy's — requesting information about 'no-poaching' agreements that bar or restrict managers from hiring workers at another store in the same chain... No-poaching clauses have come under increasing scrutiny by Democrats and some policy experts over the past several years as wage growth remains a persistent weakness for an otherwise strong and growing economy... About 80 percent of fast-food workers are constricted by no-poaching clauses, according to Healey's office."
— FTC taps Amazon critic. Politico's Nancy Scola: "FTC Democratic Commissioner Rohit Chopra is hiring Lina Khan, one of the country's foremost critics of the growing market power of U.S. tech companies and the author of a landmark paper making an antitrust case against Amazon. Chopra's move is a sign that the newly-minted commissioner is preparing to take a tough stand against Silicon Valley. He's doing so as political figures on both the left and right, including... Trump, call for greater checks on the tech industry." (Amazon.com founder and chief executive Jeffrey P. Bezos is the owner of The Post.)
From Bloomberg News:
- Panel discussion on globalization at the American Enterprise Institute tomorrow.
- Two House Foreign Affairs subcommittees hold a joint hearing on China’s trade practices tomorrow.
- Treasury Secretary Steven Mnuchin appears before the House Financial Services Committee on July 12.
- Senate Banking Committee hearing on “credit bureaus and the Fair Credit Reporting Act” on July 12.
- House Financial Services subcommittee hearing titled “Countering the financial networks of weapons proliferation” on July 12.
- Conference on manufacturing at the Brookings Institution on July 12.
- Panel discussion on “what corporate America can do for employees” at the American Enterprise Institute on July 13.
From The Post's Tom Toles:
Trump advisers face the public wrath of protesters:
How to bend the ball like soccer's biggest stars:
“Will you sign my waterboard?” Cheney gets the Sacha Baron Cohen treatment: