Last week, the trade war between the U.S and China took a step in the right direction. As I predicted would be the case right here in 10-Minute Millionaire, a “mini-deal” was reached whereby the U.S. agreed to delay the next round of tariffs, and China agreed to purchase American agricultural products.
Despite President Trump tweeting about striking a deal with China on trade last Friday, markets opened lower on Monday.
After weeks of tit-for-tat threats and leaks on trade hanging over the market, you’d think a deal would be welcome on Wall Street, even if it didn’t take on all the issues.
Yes, China had taken President Trump’s two main issues, intellectual property and subsidies, off the table. And yes, the White House had leaked plans a couple of weeks ago to potentially force Chinese companies to delist from U.S. stock exchanges, sending them into a tailspin.
But still, the two sides agreed to take a step back from a full-blown trade war. They struck a deal whereby Trump postponed the tariff hike on Chinese goods that had been meant to go into effect on Tuesday.
In return, China agreed to buy between $40 billion and $50 billion of American agricultural products.
Markets opened lower Monday anyway, as traders and analysts worried if any deal would get done – fueled by China casting a less optimistic tone about “phase one” of the deal being complete.
Then Tuesday, the markets had a strong up day as optimism (and presidential tweets) fueled a broad China-friendly ride higher.
These “will the deal or wont the deal get done” uncertainties are becoming the new form of trade trouble headline risk that traders have to navigate.
Here’s how the China trade discussion is changing – and how you can profit…
A Change in the Trade War Wind…
The tariff and trade dispute with China has been hanging over the market since January 2018. Despite this, the market has powered higher, although with some significant dips and corrections along the way.
For much of that time, neither China nor the White House have been willing to budge on the main issues. Instead, they have consistantly kicked them down the road, as both sides hope to start the real negotiations when they have the upper hand.
That’s why the mini-deal that sides both agreed to (in principle) didn’t meaningfully address Chinese intellectual property, subsidies, or currency manipulation practices that the U.S. is concerned about. It didn’t even seem to specify for how long the U.S. would postpone its tariff raise, or by when China’s purchases of American agricultural products should be completed.
In the past, this would have worked just fine. Pushing off real talks until later, while still keeping markets under a cloud of modest optimism, would at least remove any chance of a full-blown trade war right now.
Or so traders used to think.
But this week, the mood has changed…
From President to Candidate
With campaigning for the 2020 U.S. presidential election now in full swing, the market response to trade news is changing.
Traders are starting to look at President Trump from the perspective not of a sitting president, but as someone running for office. That has them wondering whether China is about to gain the upper hand in trade negotiations.
Let me explain.
Tariff increases from 25% to 30% on $250 billion worth of goods imported from China, for example, would have hit American shoppers hard just as the Christmas shopping season is starting.
Another round of tariff raises scheduled for December 15, this one a 15% point increase, would be even worse.
President Trump knows this. So do the negotiatiors from China.
Traders are increasingly concerned that this gives the Chinese leverage. Raising prices on tech gadgets, toys, and other popular Christmas presents before the election could hurt the President’s re-election chances. So Trump might be keen to sign a deal before the planned December 15 tariff raise.
Or at least make enough progress on a deal to be able to campaign as the only candidate that can end the trade dispute with China with a positive outcome for the U.S.
The China side, on the other hand, is not under the same kind of time pressure. They have no deadlines late in the year, and could afford to drag out negotiations for longer. Although to be fair, economic weakness in China that is directly related to the tariffs (more on that below) is putting pressure on President Xi, just not with the same timetable that Candidate Trump is facing.
That gives China an advantage during negotiations. In return for them not stalling, the White House may have to concede to some of their demands.
Traders are worried this may skew the final deal in China’s favor.
That’s not the full story, of course. China is under some pressure of its own…
The View From the Other Side…
In September alone, China’s exports fell by 3.2%, more than analysts had expected. That decline was almost completely due to American tariffs, as trade with other nations has not changed much.
China’s imports, meanwhile, dropped 8.5% compared to the year before, another sign showing the economy is struggling to find an equilibrium under America’s tariffs.
This was the second month in a row where these import/export numbers were dropping.
Now, it will be some time before China’s situation becomes dire. They are no doubt willing to endure into 2020 and beyond if that means getting a better trade deal.
The negotiating table isn’t the only place China is toughening its stance. A rapid military buildup in the South China Sea has China believing they have the upper hand, even against the might of the U.S. Navy. But thanks to one tiny company, America stands ready to neutralize China’s latest threat – and potentially make you a fortune in the process. You have to see this footage….
But with the anti-China demonstrations in Hong Kong now in their fifth month, China’s leadership is no doubt getting worried. A worsening economy could make make mainlanders sympathetic or lead to civil unrest among them as well.
Here’s how this is all going to play out in the markets…
Time Isn’t on Trump’s Side
As negotiations continue leading up to Christmas, expect more signs of how China will use time as leverage. If they overshoot, or downplay the U.S. President’s urgency, Trump will hit back.
That could send markets into another bout of volatility as we saw during the summer. So if the saber-rattling continues from both sides as they test each other out, be cautious trading, taking profits more quickly than usual. You can also be patient with longer term trades or investment entries, waiting for headline-driven pullbacks to get a better price on most stock purchases.
If the President continues to push hard for a complete deal to be made soon, and China stays quiet, that might mean China is happy with the deal it’s about to get.
In that case, stick to stocks without much exposure to, or competition from, China. Because when the deal is revealed, it could be worse than expected – and companies with lots of revenue coming from China as well as sectors such as American steel makers, will be punished by the markets.
Now, if numbers coming out of China continue to show a deteriorating economy, that might bring them to the table faster. The White House may well try to speed things along by making a final push to raise tariffs. If that happens, and the economic pain becomes too big for China, expect negotiations to proceed more quickly but markets to see even more volatlity.
This would bode well for U.S. companies doing business in China, especially ones that have faced a lot of regulatory hurdles there.
As the market adjusts to this new script, and as the negotiations continue, the next few weeks will show what’s going to happen.
With a strong start to earnings season this week, our main theme will continue to be to use trade-induced pullbacks to buy strong stocks on sale.
If you have longer-term money to put work, concentrate on sectors and companies with little or no exposure to China. U.S. utilities like Southern Company (SO) and Duke Energy (DUK) are some of my favorites. Consumer Staple companies like Home Depot (HD), AT&T (T), and Comcast (CMCSA) also qualify with little to no China income.
I’ll be keeping a sharp eye on the latest developments in trade negotiations, and I’ll be back with more insights as the situation unfolds.
Great trading and God bless you,
D.R. Barton, Jr.