The U.S. stock market stumbled late Friday on a “confirmatory” report China is not interested in further trade talks with the U.S. The report said that “U.S.-China trade talks have ‘stalled’ and next round of U.S.-China trade talks are ‘in flux’.
Earlier Dow jumped mid-Friday from a deep loss and almost flat on EU/Japan auto trade truce optimism despite China may abort trade talks with the U.S.
Dow jumped mid-Friday from a deep loss to almost flat on EU/Japan auto trade truce optimism despite growing uncertainty of China trade war as China may abort trade talks with the U.S. The risk-on sentiment was also boosted by removal of metal tariffs agreement between U.S. and Canada (under USMCA) coupled with economic optimism after an upbeat Michigan consumer confidence flash data for May at 102.4, the highest in last 15-years (since 2004), although the data was surveyed before the latest Trump tariffs/trade war agenda.
Early Friday, Dow plunged almost -205 points on escalated China trade war tensions as China virtually trashed hopes for a quick deal when its state media signaled a lack of interest in resuming trade talks with the U.S. under the current threat to escalate tariffs and other cold war actions such as on Huawei. China said the impact of new US tariffs is controllable on its economy and it’s apparently not very keen to resume trade talks despite Trump (U.S.) optimism.
As per earlier reports, China is not very keen on resuming trade negotiations with the US. A Chinese government-backed blog/media source said: “We can’t see the U.S. has any substantial sincerity in pushing forward the talks. Rather, it is expanding extreme pressure… If the U.S. ignores the will of the Chinese people, then it probably won’t get an effective response from the Chinese side”. The Chinese blog, which is being seen as an unofficial government mouthpiece against Trump trade war, also accused the U.S. of “playing little tricks to disrupt the atmosphere”, and insinuated that “the Huawei blacklisting had seriously jeopardized talks”.
One former Chinse commerce ministry official and a former diplomat said there's no point in holding another round of talks if Washington won't listen to Beijing. He said: "If the U.S. doesn’t make concessions on key issues, there is little point for China to resume talks. China’s stance has become more hard-line and it’s in no rush for a deal because the U.S. approach is extremely repellent and China has no illusions about U.S. sincerity”.
This unofficial Chinese signal for no further “useless” trade talks come after the U.S. Treasury Secretary Mnuchin said this week that he and the other negotiators "will most likely go to Beijing at some point in the near future”.
China's state-run media is using print, television and social media platforms to excoriate the U.S. move to censure Huawei and pressure the government to adapt its laws to facilitate freer trade, with a front-page splash invoking military and nationalist themes as it described China's position as "as firm as a boulder”. Chinese officials are also talking aggressively against U.S. “bullying” in state media.
Meanwhile, the NDRC of China sounds optimistic and said: “The overall impact of the latest 25% tariff on around $300B in Chinese goods is controllable. The government has implemented and will continue to carry forward measures to keep growth in a reasonable range. And the measures will target to stabilize areas such as consumption, investment, and employment. The government will also keep bettering its business environment and leveling the playing field, to ensure the sustainability of investments”.
But the risk-on sentiment was also under stress as a senior China Communist party official and a politburo member Wang said that in the worst case scenario, a trade war with the U.S. could reduce China’s growth this year by maximum 1%. Wang added that this dispute will not do any long-term damage and he is not so much worried about the long term effect or any structural changes as China’s own domestic market consumption is huge. Wang also said the U.S. had underestimated the tenacity of the Chinese people if it thought a trade war would “bring suffering”.
There was also a report that China’s credit rating could be affected if the trade/cold war with the U.S. is not resolved amid increasing leverage and rising debt of the country.
But Dow recovered from deep loses as China’s official response was calm & composed and not fire & fury, pointing out that both the presidents are in touch over stalled trade negotiations.
A spokesperson for China’s foreign ministry said: “China prefers to resolve disputes through dialogue. The countries’ two presidents have been in touch, but overall the U.S. has been insincere in its position. Words must be matched with deeds”.
Meanwhile, in response to U.S. actions on Huawei, China’s commerce ministry said in a statement: “We firmly oppose the act of any country to impose unilateral sanctions on Chinese entities based on its domestic laws and to abuse export control measures while making ‘national security’ a catch-all phrase. We urge the US to stop its wrong practices”.
On mid-Friday, Dow jumped on EU/Japan auto trade optimism and rallied almost +85 points from earlier -200 points slump after Trump officially announced a delay in auto tariffs decision by up to 6-months. It’s almost clear that the U.S. tries to reach trade agreements with the EU and Japan, to avoid opening another front of a global trade war, while the EU also indicated that it’s willing to negotiate with the US.
On Friday, as highly expected, in an official proclamation Friday, Trump said: “I directed the USTR Lighthizer to seek agreements to address the threatened impairment of national security from auto imports”. But, Trump could choose to move forward with tariffs during the talks, if it fails. In his proclamation, Trump pointed out that “domestic conditions of competition must be improved by reducing imports”. The proclamation said: “The United States defense and military superiority depend on the competitiveness of our automobile industry and the research and development that industry generates”.
The White House press secretary Sanders said in a statement. “The negotiation process will be led by United States Trade Representative Robert Lighthizer and, if agreements are not reached within 180 days, the President will determine whether and what further action needs to be taken”.
Meanwhile, the German Economy Minister Altmaier said: “The EU is open to zero tariffs on cars”.
The EU trade commissioner Malmstrom said the EU is willing to negotiate a trade deal with the US, but not WTO-illegal managed the trade.
Malmstrom tweeted:
“We note that the US postpones a decision on car tariffs for 180 days. But we completely reject the notion that our car exports are a national security threat. The EU is prepared to negotiate a limited trade agreement incl cars, but not WTO-illegal managed trade”.
“Will discuss with USTR Lighthizer next week in Paris and with Trade Ministers on 27 May.”
On Friday Dow also got some boost after reports that the U.S. and Canada have reached a deal on lifting metal tariffs (as highly expected), clearing a key obstacle to passage of Trump’s new trade deal (NAFTA-2/USMCA) by the U.S. Congress. The U.S. agreed to lift the tariffs in 48 hours in return for tough new measures to prevent alleged Chinese steel from entering the U.S. via Canada or Mexico, a practice known as transshipment. The deal avoids quotas on steel from the two countries, which Canada and Mexico had opposed earlier.
Trump said (without mentioning metal tariffs) he hoped it would benefit the U.S. industries and lead to the passage of the USMCA agreement:
“I’m pleased to announce we’ve just reached an agreement with Canada and Mexico to sell product without the imposition of major tariffs. The three nations had reached an agreement to sell our product into those countries without the imposition of tariffs or major tariffs. That deal is going to be a fantastic deal for our country, and hopefully, Congress will approve the USMCA quickly and then the great farmers, and manufacturers and steel plants will make our economy even more successful than it already is if that’s possible”.
As per reports, the U.S. President Trump and the Canadian PM Trudeau spoke earlier Friday about the U.S. metal tariffs and retaliatory tariffs slapped on the U.S. some exports by Canada. Trudeau said: “Now that we’ve had a full lift on these tariffs we are going to work with the United States on timing for ratification of USMCA. I am optimistic about moving forward with the agreement in the coming weeks”.
Trudeau clarified: “Steel and aluminum tariffs were greatest barriers to USMCA ratification, optimistic can move forward on it in coming weeks and will work with the United States on the timing of USMCA ratification. The US was asking for metal quotas, Canada said no”.
Although by removing metal tariffs, a major hurdle for the Congressional passage of the USMCA trade deal is removed, the deal still faces other hurdles. The U.S. Democrats have raised concerns about environmental and labor provisions in USMCA, as well as how it could affect drug prices in the U.S. Mexico passed labor law last month in part to address those concerns, but some headwinds still remain.
Joint Statement by Canada and the United States on Section 232 Duties on Steel and Aluminum- From Global Affairs Canada
“After extensive discussions on trade in steel and aluminum covered by the action taken pursuant to Section 232 of the Trade Expansion Act of 1962 (19 U.S.C. §1862), the United States and Canada have reached an understanding as follows:
1. The United States and Canada agree to eliminate, no later than two days from the issuance of this statement:
a. All tariffs the United States imposed under Section 232 on imports of aluminum and steel products from Canada; and
b. All tariffs Canada imposed in retaliation for the Section 232 action taken by the United States (identified in Customs Notice 18-08 Surtaxes Imposed on Certain Products Originating in the United States, issued by the Canada Border Services Agency on June 29, 2018, and revised on July 11, 2018).
2. The United States and Canada agree to terminate all pending litigation between them in the World Trade Organization regarding the Section 232 action.
3. The United States and Canada will implement effective measures to:
a. Prevent the importation of aluminum and steel that is unfairly subsidized and/or sold at dumped prices; and
b. Prevent the transshipment of aluminum and steel made outside of Canada or the United States to the other country. Canada and the United States will consult together on these measures.
4. The United States and Canada will establish an agreed-upon process for monitoring aluminum and steel trade between them. In monitoring for surges, either country may treat products made with steel that is melted and poured in North America separately from products that are not.
5. In the event that imports of aluminum or steel products surge meaningfully beyond historic volumes of trade over a period of time, with consideration of market share, the importing country may request consultations with the exporting country. After such consultations, the importing party may impose duties of 25 percent for steel and 10 percent for aluminum in respect to the individual product(s) where the surge took place (on the basis of the individual product categories set forth in the attached chart). If the importing party takes such action, the exporting country agrees to retaliate only in the affected sector (i.e., aluminum and aluminum-containing products or steel)”
The U.S. statement: The United States Announces Deal with Canada and Mexico to Lift Retaliatory Tariffs
“Today (17/05/2019), the United States announced an agreement with Canada and Mexico to remove the Section 232 tariffs for steel and aluminum imports from those countries and for the removal of all retaliatory tariffs imposed on American goods by those countries. The agreement provides for aggressive monitoring and a mechanism to prevent surges in imports of steel and aluminum. If surges in imports of specific steel and aluminum products occur, the United States may re-impose Section 232 tariffs on those products”.
“Any retaliation by Canada and Mexico would then be limited to steel and aluminum products. This agreement is great news for American farmers that have been subject to retaliatory tariffs from Canada and Mexico. At the same time, the Agreement will continue to protect America’s steel and aluminum industries”.
But eventually, Dow slips almost -185 points from the session high and closed around -100 points down after an old report that the “U.S.-China trade talks have ‘stalled’ and next round of U.S.-China trade talks are ‘in flux’. Scheduling for the next round of talks is ‘in flux’ because it is unclear what the two sides would negotiate. China has not signaled it is willing to revisit past promises on which it reneged earlier this month”.
Although this development was already anticipated/known by the market by an earlier report of unofficial Chinese blog and some comments from China, Dow slid from the auto and USMCA (metal) tariffs removal optimism high as the latest report was “source-based”;i.e. an official “floating balloon” by China, having more credibility.
The report said: “Negotiations between the U.S. and China appear to have stalled as both sides dig in after disagreements earlier this month. China has not signaled it is willing to revisit past promises on which it reneged earlier this month, despite showing up for talks in Washington last week”.
The report also suggested: “China has invited the U.S. delegation to Beijing, and earlier this week, Treasury Secretary Mnuchin appeared open to accepting the offer. But scheduling discussions have not taken place since the Trump administration ratcheted up its scrutiny of Chinese telecoms companies. The move was seen as a shot across the bow. The scheduling for the next round of talks is ‘in flux’ because it is unclear what the two sides would negotiate. China has not signaled it is willing to revisit past promises on which it reneged earlier this month”.
Meanwhile, on Friday in a speech to National Association of Realtors, where Trump announced a suspension of metal tariffs on Canada (under USMCA), again blamed China for the failure of the trade deal, which was almost 95% done.
Trump said: “We actually had a deal, but they broke it, OK? I’m used to that, I did it many times myself.” Trump also said U.S. farmers back him on China trade talks.
Just before the latest “source-based” news of China’s lack of interest for further trade talks with the U.S. broke out, an influential Chinese media editor (Global Times), who is also being viewed as the answer to Trump’s tweeter tantrum, tweeted:
“China will certainly retaliate for barbaric suppression Huawei received. It's a unanimous attitude of officials and ordinary people. I believe Beijing is selecting retaliation targets and approaches, minimizing damage to itself and not weakening confidence in China's opening up”.
The market is now concerned about China’s “nuclear options” to retaliate against “barbaric” Trump. The Global time's editor (unofficial proxy from China) again tweeted on early Saturday:
“Trump delays EU, Japan auto tariffs for 6 months since there's little chance of reaching a China-US trade deal in 6 months. The two sides have serious differences with the worsening political atmosphere. Negotiation terms have been laid bare to the public, making compromise difficult”.
Overall, Trump is trying to concentrate on his China trade/cold war agenda and thus does not want to launch a trade war on another front (with the EU and Japan). And Trump does not expect that China trade war issue will be resolved within the next 6-months. Trump is also trying to isolate China in his cold trade war narrative and thus resort to the old and traditional U.S. allies like the EU, Japan, Canada, and Mexico to have a truce with them, making sure that he is not involved in an all-out global trade war.
But Trump is also clearly blinking on Chinese pressure to abandon the trade talks. On late Friday, there was a report that the U.S. Commerce Department may issue a temporary reprieve for some trade restrictions placed on Huawei in this week's blacklisting. The U.S. Commerce Department said possible temporary license for Huawei would last 90 days.
Elsewhere, Qorvo, a big Huawei supplier said it’s unable to predict the scope of export restrictions imposed on Huawei and corresponding future effects on its business. As per another report, Huawei has significant stocks of its raw materials (chips) to deal with Trump trade war. And Huawei has also asked its top Asian chipmakers to maintain deliveries even after the U.S. blacklisted the company.
On Friday, the blue-chip Dow Jones Industrial Average (DJ-30) slumped -0.38% to close around 25764.00, near the mid-levels of the session low-high of 25692.14-25957.63 in a day of volatile trading. The broader S&P 500 (SPX-500) slips -0.58% to close around 2876.32, near the mid-levels of session low-high of 2855.80-2892.15 in a day of volatile trading. The tech-heavy Nasdaq Composite (IXIC) tumbled -1.04% to close around 7816.28, near the session low of 7810.35; earlier it made a high of 7918.71 in a day of volatile trading.
Overall on Friday, the US market was dragged by China trade sensitive techs (led by Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), and Cisco (NASDAQ:CSCO)), chipmakers/Huawei suppliers (AMD/ Qualcomm (NASDAQ:QCOM), Qorvo and Micron (NASDAQ:MU)), industrials (Caterpillar (NYSE:CAT), 3M (NYSE:MMM); but Boeing (NYSE:BA) helped on 737-MAX cockpit software upgrade optimism), basic materials, and also energies, while helped by defensive sectors like utilities and selected pharmaceuticals like United Health and selected telecommunication like Verizon (NYSE:VZ). Out of 11-major SPX-500 sectors, only 1 was in green as the last half-an-hour selling was quite intense.
Technical Outlook: SPX-500, DJ-30, NQ-100:
Technically, whatever may be the narrative, SPX-500 has to sustain over 2885 for a rebound to 2900*/2930-2950/2965* and further rally to 2975*/2990-3020/3050* and 3080/3135-3180/3220 in the near term (under bullish case scenario).
On the flip side, sustaining below 2875, SPX-500 may fall to 2835/2820*-2800/2780 and 2765/2735*-2715/2690* and further plunge to 2660/2635-2600/2560 in the near term (under bear case scenario).
Technically, whatever may be the narrative, DJ-30 has to sustain over 26000 for a further rally to 26200*/26300-26550/26705* and 26850/26955*-27050*/27400 and 27750/28100-28375/28650 in the near term (under bullish case scenario).
On the flip side, sustaining below 25950, DJ-30 may further fall to 25750/25550-25400/25300 and 25200/25000-24800/24650 and further 24450/24250-24100/24000 in the near term (under bear case scenario).
Technically, whatever may be the narrative, NQ-100 has to sustain above 7555 for a rebound to 7600/7655-7730*/7765 and further rally to 7880*/7905-7955/8050* and 8120/8195-8250/8360 in the near term (under bullish case scenario).
On the flip side, sustaining below 7530, NQ-100 may fall to 7465*/7360-7260/7190 and 7135/7085-7045/7000 and further plunge to 6770/6700-6600/6520 in the near term (under bear case scenario).