China Hits Back at U.S. With Tariffs on $50 Billion of Goods China responded to the Trump administration’s latest proposed penalties on Chinese goods, announcing 25% tariffs on critical American exports, including soybeans, airplanes and autos.

The Ministry of Commerce said the tariffs will cover 106 types of products and will affect $50 billion of Chinese imports of U.S. products. (…) The Commerce Ministry didn’t specify when the new tariffs would take effect. (…)

• Specter of Full Trade War Roils Markets

The game of chicken has reached stage 2 with both “players” having loudly and firmly planted their feet, clearly displayed their weapons and waiting to see if one will blink before taking real actions. Let’s hope there are high level, cool-headed exchanges beneath this dangerous posturing.

This is a very dangerous game played by two of the most indebted countries in the world, right when world demand is showing worrying signs of weakness:

• U.S. retail sales have been down in each of the last 3 months.
• German retail sales are also down in each of the last 3 months, by a very high 6.9% annualized rate in real terms. Sales are down in most EU countries as this Haver Analytics table shows.

• Motor vehicle sales have cratered 11.9% SAAR in Europe in the last 3 months.
• U.S. vehicle sales are reported up 2.4% in March to 17.48 million units (SAAR), following two months of decline, but March had an extra selling day which luckily was Easter Monday April 2. Easter is a big sales weekend which was in mid_April last year. U.S. vehicle demand remains weak, showing clear signs of a cyclical peak.

(CalculatedRisk)

Vehicle demand is crucial to the global manufacturing ecosystem which is showing signs of peaking as well:

Global Manufacturing PMI at five-month low in March

  

This was not an insignificant decline in global new manufacturing orders, with new export orders tanking to 51.8.

Also interesting to see the wide dispersion that has developed in 2017 but with all countries showing a downtrend in recent months. Note that this Scotiabank chart (via The Daily Shot) is a bit misleading using the ISM data for the U.S. and Markit data for the ROW. The Markit U.S. PMI has actually plateaued at 55.6 in March with growth in new orders “edging down to a three-month low”.

Who would win a trade war? (NBF)

(…) China is more vulnerable than the United States in one very important way. Exports account for about 20% of GDP in China, versus only 12% in for the United States. Further, the United States accounts for 23% of Chinese exports, whereas only 8% of U.S. exports go to China.

China would be in an even more precarious position if many of its other major trading partners joined forces with the United States against its trade practices. U.S. allies Japan, South Korea and Germany are all top 10 destinations for Chinese exports. In an effort to encourage this co-operation, the Trump administration recently filed a complaint at the WTO accusing China of IP theft and of blocking U.S. companies from competing in its market. This action was taken because the EU and Japan made their support conditional on the United States including the WTO in its trade dispute strategy.

The United States, the EU and Japan are already united in their opposition to having the WTO remove China’s designation as a “non-market economy.” This designation makes it easier for trade partners to impose tariffs on goods they conclude have been sold below fair value. Legally implementing tariffs under WTO regulations against a market economy requires a much heavier burden of proof.

The two U.S. sectors most vulnerable to Chinese retaliation are agriculture and aircraft-related products, the only ones where the United States has a significant trade surplus with China. Indeed, one out of every four planes currently produced by Boeing is sold to Chinese buyers.

As for agriculture, China is the biggest customer for U.S. agricultural products after Canada. In 2016, 62% of U.S. soybean exports and 77% of sorghum exports went to China. Tariffs would further depress farm incomes, which are expected this year to slide to their lowest level since 2006. Chinese retaliation against farm products could also have major political repercussions, particularly with congressional elections looming. The vast majority of farm states voted for President Trump in the last election.

China could also make it more difficult for U.S. businesses operating in China by targeting them for say regulatory or health infractions. Companies like Apple and Starbucks derive substantial revenue from Chinese-based operations, while retailers like Wal-Mart benefit from importing low-cost electronics, clothes and furniture from China. However, if China pushes too hard on this front the U.S. could retaliate with similar measures against Chinese firms in the U.S. and/or encourage U.S. firms to migrate to lower-cost countries at a faster pace than is already occurring. Even though China is trying to move up the value-chain, it is still heavily reliant on the production of lower cost goods to employ its vast population of low-skilled workers.

Moreover, unlike President Trump, China’s leader controls the press and doesn’t need to worry about elections. He can also immediately marshal vast financial resources to keep Chinese factories running and workers employed regardless of economic conditions in the short term. Providing similar aid to U.S. farmers would require time-consuming congressional approval.

China is the largest foreign holder of U.S. government debt. It holds $1.17 trillion or 20% of the $6 trillion in federal debt held by foreign sovereign investors. If China decides to retaliate by unloading significant quantities of U.S. sovereign debt, it could cause a significant spike in rates at a time when the United States is running a high deficit and rates are already inching up.

However, playing this card could also be very detrimental to China. First, the sharp increase in rates would reduce the value of U.S. bonds in China’s portfolio of foreign reserves. Second, higher borrowing costs would slow down the U.S. economy and further hurt demand for Chinese exports. This mutual state of vulnerability most likely precludes China from taking action on this front.

While the U.S. and China will take measures to walk back from a full-blown trade war, heightened trade tensions between the two will be the new normal for the foreseeable future. A game changer in America’s favour would be if many of China’s major trade partners (i.e., Japan, the EU, and South Korea) joined forces with the United States against its trade practices. The United States is not the only country to have complained about China’s trade policies.

In an effort to prevent this alliance forming against it, look for China to announce the opening of more sectors to foreign businesses followed by American accusations that they have not gone far enough. Or simply put, the trade road ahead is set to get bumpier.

More on this via Cumberland Advisors’ David Kotok:

• Blond: “Winners and Losers from Global Trade” – http://www.cumber.com/winners-and-losers-from-global-trade/
• Brusca: “Why David Blond Is Wrong on Trade” – http://www.cumber.com/why-david-blond-is-wrong-on-trade/

 

BTW:

From a Raymond James research report:

In this note, we make the case that 2017, a year of much turmoil in the bedding industry, unit demand (mattresses and foundations) actually grew year-over-year versus most investors’ belief that it did not. The wild card, as we show, was low cost Chinese mattress imports. We further suggest that this growth, which has continued in early 2018, will ultimately catalyze industry participants to petition for an antidumping investigation against Chinese imports.

EARNINGS WATCH

The bull remains uncomfortably seated on the 200d m.a. (2588), still rising although gradually weakened by a declining 50d a flattening 100d..

Q1’18 earnings must not disappoint!

We already have 19 companies in and 84% have exceeded expectations. Ten of the 19 are in Consumer Discretionary (4/75%) and Consumer Staples (6/83%). Another 6 are in IT (83%) and 3 in Industrials (100%). Beat rates on revenues are similar. The surprise factor is a big +9.0% overall on EPS and +1.6% on revenues.

There have been 3 new corporate guidance releases in the past week and 2 were positive and one negative, bringing the total so far to 57 positive and 72 negative, much better ratios than at the same time last year and during Q4’17.

• First-Quarter Results Expected to Show Thriving Trading Desks Following wild price swings for markets in the first quarter, Wall Street’s trading desks are poised to report one their best three-month periods in years.

While no one is expecting a new peak in trading like the ones that occurred in 2009 and shortly before the financial crisis, the trading desks of the biggest U.S. banks are expected report revenue as much as 5% higher than a year ago, say analysts at Credit Suisse .Analysts at Jefferies are a bit more optimistic, saying that trading results, which sometimes make or break a quarter for some the largest U.S. lenders, could rise in the high single digits.

That would be welcome news to Wall Street and bank investors, especially since the first quarter of 2017 was itself a relatively strong trading period in the wake of the U.S. presidential election. Another boost could put the five biggest U.S. banks in line for possibly their biggest trading quarter since the beginning of 2015.

Still, the three-month bump is relatively small in the context of the surging volatility earlier this year. The trading business more broadly has shrunk since its heyday, pressured by a decline in active investment, an increase in low-cost electronic trading and a scaling back of proprietary trading. For the five biggest Wall Street banks, trading revenues were only about $70 billion last year, down from nearly $100 billion in 2009. (…)

JPMorgan Chase & Co. and Citigroup Inc., which have the two biggest trading units by revenue, have said they expect trading revenue to be up by “single digits” from a year ago. Goldman is also expected to benefit from a comparison to its poor showing a year ago, when first-quarter trading revenue dropped due in part to a stumble on its commodities desk. (…)

More Renters Give Up on Buying a Home A growing percentage of apartment renters aren’t interested in buying a home as affordability challenges take a bigger toll on American aspirations of homeownership.

In all, 20% of renters said they have no interest in owning a home, up from 17% in August and 13% in 2016, according to results of a semiannual survey of renters by mortgage company Freddie Mac in January.

Two-thirds of renters who plan to continue renting said they are doing so for financial reasons, up from 59% two years ago, according to the survey. (…)

The S&P CoreLogic Case-Shiller National Home Price Index rose 6.2% in January from the same month a year earlier, while the average apartment rent increased a more manageable 3.9% in the first quarter from a year earlier, according to real-estate research firm Reis Inc. (…)

Some 35% of baby boomers said they have no interest in owning a home, up from 31% in August and 23% two years ago, according to the Freddie Mac survey.

At the same time, concerns about affordability are most prevalent among younger renters. Nearly three-quarters of millennials said they are renting for financial reasons, up from 59% two years ago. (…)

Eurozone Inflation Ticks Up, Stemming Months of Decline Consumer prices picked up in March for the first time in four months, while the unemployment rate fell to its lowest level in more than nine years during February, developments that will reinforce the ECB’s belief that it is on track to meet its inflation target over coming years.

(…) The European Union’s statistics agency Wednesday said consumer prices in that month were 1.4% higher than a year earlier, an increase from the 1.1% rate of inflation recorded in February. (…) But the core rate of inflation was unchanged at 1.0% in March. (…)

Price pressures are particularly strong on Services, meaning that wages are accelerating.

Meanwhile in China

China Injects $9.7 Billion Into Anbang After Fraud Alleged

The government needs to address its large number of large zombies. Expect many more bail outs and restructuring in 2018.

Not unrelated:

More wealthy Chinese shell out for UK ‘golden visas’ Brexit worries pale next to Britain’s attractiveness as capital bolthole

The Ft reports on the sharp increase in the number of wealthy Chinese acquiring UK “golden visas” that give residency in return for investing £2m or more in assets (they can apply to settle permanently after a period of three years if they invest £5m and after two years if they invest £10m). “So dominant were mainland Chinese in the investor visa scheme last year that they outnumbered Russians, the next biggest recipients by country, by 250 per cent. If Hong Kong and Macau recipients are counted, then 146 Chinese got investor visas last year, up 82.5 per cent on 2016.”

DID YOU KNOW THAT?