The U.S. stock market surged Tuesday as Trump blinks on Huawei blackout after China signals of using an ultimate “nuclear option” by banning export of rare earth elements to the U.S. Dow jumped over +200 points and global stocks also bounced back on hopes of de-escalation of trade/cold war between the U.S. and China after a move by the U.S. Commerce Department to ease restrictions on the ability of China's Huawei to do business with U.S. companies and provided 90-days grace period.
The market views this 90-days Huawei grace period as an opportunity for U.S. and China to reach a tentative trade deal, even though that may not be termed as “great” or “comprehensive” in Trump’s language. But as per reports, China has not assured a separate meeting on trade between Xi and Trump in the sideline of G20 meeting in Japan late June.
Overall, Trump delayed blacklisting Huawei on concerns it could disrupt China trade talks further and only took action by providing a grace period to Huawei after trade negotiations completely frozen. The Huawei ban plans were on the table for months but the decision to curtail the company's access to U.S. suppliers set an alarm bell. Some U.S. national security officials are concerned Trump could scrap the Huawei blackout order to bring back bilateral trade negotiations with China. The EU is also coming around to the severity of the alleged “spying and national security” threat posed by Huawei, while Trump's Huawei ban also threatens to disrupt a global 5G rollout.
On late Monday, the U.S. Commerce Secretary Ross said Huawei will be able to access U.S. technology and purchase equipment from American companies for up to 90-days in order to maintain existing network and update handsets. U.S. corporations, meanwhile, will use the time to source alternative suppliers and prevent domestic systems - especially in rural areas - from any potential disruption. Huawei will also provide software updates to existing Huawei handsets until 19th Aug. The move is seen as for keeping Huawei in active business, so as to prevent internet, computer and cell phone systems from crashing.
Under the move, Huawei and its 68 non-US affiliates will be granted 90-days temporary general license (TGL) to have limited engagement in transactions involving the export, re-export, and transfer of items. With the arrangement, this license will allow operations to continue for existing Huawei mobile phone users and rural broadband networks. The Commerce Department said it will evaluate whether to extend the exemptions beyond 90-days.
Department of Commerce Issues Limited Exemptions on Huawei Products: 20/05/2019
“Today, the Bureau of Industry and Security (BIS) of the U.S. Department of Commerce announced that it would issue a Temporary General License (TGL) amending the Export Administration Regulations (EAR) to authorize specific, limited engagement in transactions involving the export, re-export, and transfer of items – subject to the EAR – to Huawei Technologies Co. Ltd. and its sixty-eight non-U.S. affiliates, which were added to the Bureau’s Entity List on May 16, 2019. This license will be effective on May 20, 2019, and lasts 90 days”.
“The Temporary General License grants operators time to make other arrangements and the Department space to determine the appropriate long term measures for Americans and foreign telecommunications providers that currently rely on Huawei equipment for critical services,” said Secretary of Commerce Wilbur Ross. “In short, this license will allow operations to continue for existing Huawei mobile phone users and rural broadband networks”.
“The Temporary General License authorizes certain activities necessary to the continued operations of existing networks and to support existing mobile services, including cybersecurity research critical to maintaining the integrity and reliability of existing and fully operational networks and equipment. Exporters will be required to maintain certifications, to be made available when requested by BIS, regarding their use of the TGL. With the exception of the transactions explicitly authorized by the TGL, any exports, re-exports, or in-country transfers of items subject to the EAR will continue to require a special license granted after a review by BIS under a presumption of denial. The Department will evaluate whether to extend the TGL beyond 90 days”.
“Huawei was added to the Entity List after the Department concluded that the company is engaged in activities that are contrary to U.S. national security or foreign policy interests, including alleged violations of the International Emergency Economic Powers Act (IEEPA), conspiracy to violate IEEPA by providing prohibited financial services to Iran, and obstruction of justice in connection with the investigation of those alleged violations of U.S. sanctions, among other illicit activities”.
“The Bureau of Industry and Security’s mission is to advance U.S. national security and foreign policy objectives by ensuring an effective export control and treaty compliance system and promoting continued U.S. strategic technology leadership. BIS is committed to preventing U.S.-origin items from supporting Weapons of Mass Destruction (WMD) projects, terrorism, or destabilizing military modernization programs. For more information, please visit www.bis.doc.gov”.
But the overall optimism was quite limited amid China's hint about severe retaliation for the broader U.S. decision to block Huawei out of U.S markets - which accounted for about 15% of its $70 billion in business last year - and its pressure on allies around the world to do the same.
China will retaliate after Trump blacklisted Huawei; China’s ambassador to the EU said: “This is wrong behavior, so there will be a necessary response,” Zhang Ming told Bloomberg, describing the action as politically motivated. “The U.S. government is trying to bring down Huawei through administrative means.” Meanwhile, Nike (NYSE:NKE), Adidas (DE:ADSGN), and other footwear giants urged Trump to reconsider his tariffs on shoes made in China.
China's EU Ambassador Ming slammed the U.S. action on Huawei as politically motivated and said: "This is wrong behavior, so there will be a necessary response. Chinese companies' legitimate rights and interests are being undermined, so the Chinese government will not sit idly by. The U.S. government is trying to bring down Huawei through administrative means”.
Overall, China vowed to respond to recent “bullying” by the U.S. There are no details yet on what countermeasures China may take in response to the U.S. action against Huawei, as a Chinese Foreign Ministry spokesman said, "wait and see”.
But as per reports, China may use its ultimate nuclear option on the trade war with the U.S. in the form of banning exports of rare earth elements, used for chip making and other sophisticated techs including a military application. The U.S. relies on China, the dominant global supplier, for about 80% of its rare earth imports. China has global dominance on rare earth elements, used mainly for chip making. Although the US has improved its own/China alternative rare earth processing capabilities over the last few years, it’s still largely dependent on China.
As per reports, Chinese President Xi has recently visited strategically important rare earth elements processing factory at JL Mug in China, accompanied by his chief trade negotiator Liu He, a warning signal to the U.S. that China may use rare earth as a retaliation measure as the trade/cold war heats up. As a reminder, China finished similar trade/cold war with Japan back in 2011 with the same threat of rare earth elements supply as it’s critical for Japan’s high tech economy, tech/chip industry. This time also, China could finish its trade/cold war with the U.S. by simply using the “nuclear option’ of rare earth materials without using treasuries.
Notably, Xi's visit came just hours after the Trump on Friday blacklisted Huawei and threatened to cut it off from the U.S. software and semiconductors it needs to make its products. A spokesman for China’s foreign ministry said on Monday to “please wait and see” how the government and companies respond.
China’s President, Xi also urged the nation to “Prepare for new long march and start all over again” as China is also preparing for an all-out trade/cold war with the U.S. Although, Xi didn’t mention any trade war, the underlying message was clear-The Chinese people must prepare for economic hardship from the growing trade war. Xi delivered his speech from Jiangxi, the city where the defeated Red Army started the original "Long March" in 1934. Chinese state media said about Xi’s call for “Long March” as “every generation has its own long march”.
Xi said on Monday: "We are here at the starting point of the long march to remember the time when the Red Army began its journey. We are now embarking on a new Long March, and we must start all over again!" Chinese President Xi signaled there would be no end to the trade war in the near future. There was also an earlier report that scheduled talks between the U.S. and China regarding trade negotiations had stalled.
Meanwhile, Chinese state media blamed Trump’s "bullying" tactics for the collapse of trade talks. China has previously warned that there's no point in holding more talks if the U.S. isn't "sincere" about wanting to achieve a fair outcome. It said: "The People’s Republic (of China) has been standing tall in the East for the last 70 years, it has never lowered its head and it has never feared anyone. History will prove again that bullying and threats by the US will not work”.
Elsewhere, the influential Global Times editor, China’s proxy for Trump’s tweeter tantrum tweeted on Tuesday that the U.S will soon have a nervous breakdown: ”The US is now picking on China's drone maker DJI also. These irrational behaviors of the US only made the Chinese wonder if Washington is in a rush to reach a trade deal. Conclusion of the Chinese: drag it out. Americans are about to have a nervous breakdown".
Also, there were signs that Trump is 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. Germany’s economy ministry said they are looking at efforts of U.S. sanctions against Huawei on German firms.
Meanwhile, Nike, Adidas, and other U.S. footwear giants urged Trump to reconsider his tariffs on shoes made in China, terming the proposed tariffs as “unfathomable and catastrophic”. The existing tariffs on these China made footwear is already high at 30% and Trump is now proposing another 25%.
The U.S. footwear companies Nike and Adidas are publicly airing their grievances and having their say about President Trump's pending decision to slap tariffs on footwear made in China. The companies are calling the policy catastrophic for U.S. consumers, U.S. companies and the American economy as a whole as the U.S. consumers may have to pay almost $7B a year for Trump tariffs on such footwear.
The two footwear giants have been joined by 171 additional footwear companies in requesting the President to hold off on raising tariffs further. The letter was also addressed to the US Treasury Secretary Mnuchin, Commerce Secretary Ross and NEC director Kudlow. The industry estimates that the tariffs if implemented, would add $7B in new costs per year that would need to be passed onto the consumer.
The U.S. footwear companies association pointed out: "On behalf of our hundreds of millions of footwear consumers and hundreds of thousands of employees, we ask that you immediately stop this action to increase their tax burden. Your proposal to add tariffs on all imports from China is asking the American consumer to foot the bill. It is time to bring this trade war to an end. We don’t make enough to absorb that. The only way it can is to be passed onto the consumer”.
The U.S. import duties have been already higher for footwear makers due to longstanding tariffs that already sometimes exceed 30% for those in the industry. Nike makes 26% of its apparel and footwear in China while Sketchers produces about 65% of its products there. In Sketchers' case, not all of the products manufactured in China are imported to the U.S; while Under Armor gets about 18% of its products from China, down from 46% in 2013, and has targets of getting that number down to 7% by 2023. The U.S. imported around $11.4B in footwear from China last year.
This isn't the first time the industry has sounded off against proposed tariffs, either. In March of last year, more than 100 brands wrote to Trump to urge him to reconsider tariffs. The March letter said: “Given the price sensitivity of our products, any additional increases in our costs would strike right at the heart of our ability to keep product competitively priced for our consumers”.
The full letter released on Monday by the Footwear Distributors & Retailers of America (FDRA):
Dear Mr. President:
“As leading American footwear companies, brands, and retailers, with hundreds of thousands of employees across the U.S., we write to ask that you immediately remove the footwear from the most recent Section 301 list published by the United States Trade Representative on May 13, 2019. The proposed additional tariff of 25 percent on footwear would be catastrophic for our consumers, our companies, and the American economy as a whole”.
“There should be no misunderstanding that U.S. consumers pay for tariffs on products that are imported. As an industry that faces a $3 billion duty bill every year, we can assure you that any increase in the cost of importing shoes has a direct impact on the American footwear consumer. It is an unavoidable fact that as prices go up at the border due to transportation costs, labor rate increases, or additional duties, the consumer pays more for the product”.
“This significant tax increase, in the form of tariffs, would impact every type of shoe and every single segment of our society. In fact, our industry’s trade association, the Footwear Distributors & Retailers of America (FDRA), ran the numbers and the results are staggering. FDRA estimates your proposed actions will add $7 billion in additional costs for our customers, every single year. This dramatic increase would be on top of the billions of Americans already pay as a result of the current tariff burden on footwear imports that was started in 1930”.
“High footwear tariff rates fall disproportionately on working-class individuals and families. While U.S. tariffs on all consumer goods average just 1.9 percent, they average 11.3 percent for footwear and reach rates as high as 67.5 percent. Adding a 25 percent tax increase on top of these tariffs would mean some working American families could pay a nearly 100 percent duty on their shoes. This is unfathomable”.
“There have been suggestions that industries should quickly shift sourcing to countries other than China in the wake of these additional tariff threats. While our industry has been moving away from China for some time now, footwear is a very capital-intensive industry, with years of planning required to make sourcing decisions, and companies cannot simply move factories to adjust to these changes. Any action taken to increase duties on Chinese footwear will have an immediate and long-lasting effect on American individuals and families. It will also threaten the very economic viability of many companies in our industry”.
“On behalf of our hundreds of millions of footwear consumers and hundreds of thousands of employees, we ask that you immediately stop this action to increase their tax burden. Your proposal to add tariffs on all imports from China is asking the American consumer to foot the bill. It is time to bring this trade war to an end”.
Overall, the letter penned down by the FDRA is a true reflection of the reality of Trump trade war on the main street and to the contrary against Trump’s repeated narrative that China is paying billions of tariffs on its exports to the U.S. to make “America great”, whereas the reality is Trump tariffs are making “America poor again” and Trump is actually playing games of politics ahead of the 2020 election by paying U.S. farmers some “trade war subsidy” at one hand and at the same time collecting China/other tariffs by another hand from the U.S. consumers. Trump is actually taxing U.S. public at one hand and giving tax cut benefits by another hand.
As per reports, almost $72B “Trump tariffs” haven collected by the US Treasury since Trump took charge of the oval office, while Trump is set to provide around $1T tax cut benefits to the U.S. public/corporates over 10-years.
Although, Trump is trying for “Made in America for Americans” theme through his trade war agenda to get back jobs (nationalistic and anti-globalization image), the reality of the day is the U.S. has no alternative domestic manufacturing facilities to match lower Chinese costs and yet high-quality advantage.
The U.S. wage, raw materials costs are so high that even if America manufactures that Chinese made footwear in the country, it will be so much costly that many common Americans will not be able to wear any footwear at all. The same is true almost for all the other consumer goods the U.S. imports from China for its daily life necessities. Even, Trump’s own shirt, tie, shoes, watch, pen, and iPhone may be “Made in China” rather than America.
As per a recent joint survey by American Chamber of Commerce in Shanghai and China on the impact of US-China tariffs, results showed that the negative impact of tariffs is clear and hurting the competitiveness of American companies in China. Around 75% of respondents said the tariffs hikes are having a negative impact on their business. Among them, manufacturers suffered most with 81.5% for US tariffs and 85.2% for Chinese tariffs. Impacts include lower demand (52.1%), higher manufacturing costs (42.4%) and higher sales prices (38.2%).
Also, companies are increasingly adopting an “In China, for China” strategy (35.3%), or delaying and canceling investment decisions (33.2%). However, 40.7% are considering or have relocated manufacturing facilities outside China. For those moving, Southeast Asia (24.7%) and Mexico (10.5%) are the top destinations. Only 6% said they’re relocating back to the US.
On non-tariff measures, 20.1% said there were “increased inspections” in China, and “slower customs clearance (19.7%), while 14.2% said there was “slower license approvals and 14.2% said there were increased regulatory scrutiny. But 53.1% said there was no increase in non-tariff retaliatory measures by the Chinese government.
Amid all these “wars of words” on trade, this has now turned into a cold war. There were some reports that Trump admin has blacklisted some Chinese surveillance companies from doing business in the U.S. But China is also showing flexibility in this “war of attrition” on trade. The Chinese Ambassador to the U.S. said Trump admin has more than once changed its mind in trade talks but China is still committed and remains ready to continue trade talks with the U.S. colleagues.
On Tuesday, the blue-chip Dow Jones Industrial Average (DJ-30) jumped +0.77% to close around 25877.33, near the session high of 25898.27; earlier it made a low of 25779.61 in a day of volatile trade. The broader S&P 500 (SPX-500) soared +0.85% to close around 2864.36, almost at the session high of 2868.88; earlier it made a low of 2854.02 in a day of moderate volatility. The tech-heavy Nasdaq Composite (IXIC) zoomed +1.08% to close around 7785.72, near the mid-levels of session low-high of 7752.92-7804.44 in a day of moderate volatility.
Overall, the market was helped by China trade sensitive basic materials, industrials, and techs/chipmakers/Huawei suppliers (Apple (NASDAQ:AAPL), Intel (NASDAQ:INTC), AMD, Qualcomm (NASDAQ:QCOM), Nvidia, Xilinx (NASDAQ:XLNX), Broadcom (NASDAQ:AVGO), and Micron (NASDAQ:MU)) after Huawei officially got 90-days grace period from the complete U.S. blacklisting. Dow was also helped by Boeing (NYSE:BA) after a report that the U.S. FCC officials have detected “bird collision” as the primary reason for the 737 Max crash in March in Ethiopia, not any glitch in cockpit software/hardware as earlier assumed. Kohl’s and J.C. Penney plummeted on an earnings miss. The U.S. market was also dragged by defensive sectors like consumer staples (P&G, Coca Cola).
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).