Friday, May 17, 2019

Markets erase early gains on a report US China trade talks have stalled

Dow dropped 98, decliners over advancers about 3-1 & NAZ lost 81.  The MLP index fell 1+ to the 253s & the REIT index were off 1+ to the 383s.  Junk bond funds declined while Treasuries rose in price.  Oil was off slightly in the 62s & gold sank 9 to 1277.25,942

AMJ (Alerian MLP Index tracking fund)

Live 24 hours gold chart [Kitco Inc.]

3 Stocks You Should Own Right Now - Click Here!

The White House & the Commerce Department have made one of the busiest for trade news in recent months.  A few hours ago, the US & Canada agreed to jointly lift tariffs on steel & aluminum.  In a joint statement, the 2 countries said: "After extensive discussions on trade in steel and aluminum.... the United States and Canada have reached an understanding as follows, the United States and Canada agree to eliminate, no later than two days from the issuance of this statement, all tariffs the United States imposed under Section 232 on imports of aluminum and steel products from Canada. Additionally, "the United States and Canada agree to terminate all pending litigation."  The move came hours after Pres Trump agreed to delay his decision on slapping tariffs on European, Japanese & other global automakers, by 180 days.

US, Canada lift steel, aluminum tariffs pressuring China

Escalations in its trade dispute with the US not only could dent China's economy but also impact its credit standing, according to ratings agencies.  China’s credit remains strong despite a weakening economy & a high-stakes tariff battle it is engaged in with the US.  However, should the impasse linger on, the damages could become greater & start having some deeper impacts.  “The tariff war is negative for China especially at a time when its policy makers are battling problems of rising debt and increasing leverage in its economy,” ratings agency DBRS said in a note.  “The economic impact on China of rising tariffs would be broader than just via its trade with the U.S.”  An accompanying release said the impact of more central bank intervention could impact “the future of [China’s] public debt ratio and China’s rating.”  Reductions in credit ratings often translate to higher interest rates for a country's bonds.  China's debt is currently equivalent to $5.3T in $s (about 43% of its GDP).  DBRS, the 4th-largest ratings agency in the world, has China rated “A,” which is its 3rd-highest classification.  However, it recently changed the outlook to negative as the tariff issues pile up.  “China remains a middle-income country that generally lacks the historic openness, institutional credibility and transparency of the major global financial centers,” the firm said in an earlier note.  Negotiators on both sides say they remain optimistc a deal can be reached, though markets have been focused on the more immediate impacts of existing tariffs & threats of ones to come.  Other ratings agencies have noted the danger to further intensifying relations.  “An abrupt breakdown in trade talks, if that were to occur, will inject considerable policy uncertainty, increase risk aversion and lead to an abrupt repricing of risk assets globally,” Moody's said in a note.  “In China, increased US tariffs will have a significant negative effect on exports amid an already slowing economy.”  Fitch said China could offset the additional tariffs with more monetary easing, but noted it expects GDP to fall to 6.1% this year from 6.6% in 2018.  Should the U.S. extend its sanctions, that could knock off another ½-point from the growth figure, the agency added.  “But if trade tensions eventually lead to blanket U.S. tariffs on all Chinese goods, the potential rating impact could be greater, as it may tempt the authorities to abandon their restrained approach to policy easing, and adopt credit stimulus measures that exacerbate the country’s already significant financial vulnerabilities,” said Fitch.

China faces possible hit to credit rating if the trade war isn’t resolved

Japan has agreed to lift longstanding restrictions on American beef exports, clearing the way for US products to enter the market regardless of age, the Dept of Agriculture announced.  The news comes on the heels of other important trade developments, including the Trump administration’s plans to delay auto tariffs on the EU & Japan & lift steel tariffs on Canada & Mexico.  In 2005, Japan imposed restrictions on cattle over 30 months old for US.beef imports in response to the outbreak of bovine spongiform encephalopathy, sometimes known as mad cow disease.  According to the USDA announcement, Japan agreed to remove that age limit for US beef imports.  The new terms, which take effect immediately, allow US products from all cattle, regardless of age, to enter Japan for the first time since 2003, the gov said.  “This is great news for American ranchers and exporters who now have full access to the Japanese market for their high-quality, safe, wholesome, and delicious U.S. beef,” Agriculture Secretary Sonny Perdue said.  “We are hopeful that Japan’s decision will help lead other markets around the world toward science-based policies.”  American beef sales to Japan topped $2B last year, representing approximately ¼ of all US beef exports.  The US Meat Export Federation estimates that expanded access without the age restrictions could increase US beef sales to Japan 7% to 10% ($150M-200M annually).  It said the ability of the industry to use beef from over-30-month cattle also will lower costs for companies exporting processed beef products to Japan.  On the news, Chicago Mercantile Exchange cattle futures moved higher, reversing some recent weakness.  The Aug feeder cattle contract was up more than 1% & the Aug live cattle contract also was slightly higher.  “There are countries and regions where it takes decades to build up to $200,” said a spokesman for USMEF.  “And yet in Japan, we’re going to add that business in really a short period of time. So in a way, this is kind of like opening up a whole new medium-sized market.”

Japan ends longstanding trade restrictions on American beef, setting stage for exports to grow

Negotiations between the US & China appear to have stalled as both sides dig in after disagreement earlier this month.  Scheduling for the next round of negotiations is “in flux” because it is unclear what the 2 sides would negotiate, according to sources briefed on the status of the talks.  China has not signaled it is willing to revisit past promises on which it reneged earlier this month, despite showing up for talks in DC last week.  China has invited the US delegation to Beijing.  Earlier this week, Treasury Secretary Steve Mnuchin appeared open to accepting the offer.  But sources say 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.

US trade talks with China have stalled: Sources

This was an unusually wild day for stocks as news on the trade front dominated choppy trading.  Adjustments to trading arrangements for the US will take time to assess this weekend.  However the biggest news is that US-China talks have stalled.  That's hardly a surprise for those watching developments.  But its recognition is chilling, especially for the bulls.  The Dow had been in the black all day.  Selling in the last hour pulled it into the red with a little buying at the close.  For the week, the Dow fell 180.  Once again this was not a good time for nervous investors.

Dow Jones Industrials

No comments: