trade war

Nonfarm Payroll Risk Tomorrow?

Nonfarm payrolls (NFP) report tomorrow morning. Two predictive reports came out today showing a weaker jobs market. ADP came out below expectations and jobless claims climbed now two weeks in a row. Other than inflation reports, nonfarm payrolls are probably the most important economic indicator for markets.

With stocks in a slight downtrend of late, hoping for trade war relief we’d be cautious going into tomorrow’s report.

Jobless Claims Higher

jobless claims report
Source

Higher jobless claims typically means a slowdown of economic strength. Jobless claims are still near all-time record lows but markets care about the latest direction.

You see in the chart jobless claims picking up the last two weeks.

Those numbers will get reflected in tomorrow’s nonfarm payroll report.

ADP was also lower than expectations today which over time parallels the NFP report.

Trade War Reaction?

Trade war news has picked up in the last two weeks. The slowdown in hirings could be related to business leaders taking a wait-and-see approach to trade war news.

Bloomberg reported that ISM’s recent strength may have been because of a pull-forward of demand ahead of tariffs. Companies wanted to lock in lower prices before tariffs kick in and raise prices. If so that would imply strength now pulled forward demand from Q3. That would slow demand going forward and could be part of the slower jobs numbers as companies prepare.

The auto industry had positive news today that the US and EU were in talks to potentially cancel mutual tariffs.

Most importantly though is the US-China relationship which has apparently publicly soured. But the US-EU auto news brings hope that The US and China could also be pressing ahead behind the scenes.

Round Of Tariffs Hit Tomorrow

The first round of tariffs take affect tomorrow. China said if the US follows through with their tariff plans they will be answered in kind. The US in response has said that if China adds tariffs the US will follow. That sounds like a never-ending cycle if it happens.

Conclusion

We have a big news day tomorrow.

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China Trade War Strikes Micron

We said a week ago on Monday to reduce China exposed tech stocks. Micron (NASDAQ:MU) is potentially the latest impacted by the US-China trade war.

News hit that they may lose their China business based on a patent lawsuit. China makes up 50% of Micron’s business and, if true, looks like a trade war incited decision.

Competitor to Micron UMC claimed today that Micron will no longer be able to sell multiple DRAM and NAND products in China. Micron denied they were served such an injunction.

China Blows Back

Since the US administration upped the tariff ante to $200B China didn’t answer directly. They did answer quietly in other ways when accepting Iran oil against President Trump’s calls. They may have also let their Yuan drop even though they said they planned not to.

This Micron move, if UMC’s statement is correct would be a direct blow back at the US hurting a key US semiconductor company.

China Front Runs Trump’s Export Restrictions

If the Micron ban is true China would have front ran Trump’s attempt to move legislation to restrict exports to China.  Micron could have been one of the companies at risk to have intellectual property stolen.  If this move is true, China would have accomplished the export ban first.

Hurts Tech

If true it shows how difficult a trade war with China can be given the potential dislocation of the supply chain.  Companies would have to find new suppliers and purchasers. It can disrupt costs and earnings for multiple quarters.

Drag Tech Stocks

If Micron confirms this news it will be negative for many other tech stocks with China exposure and specifically semiconductor companies.

Conclusion

We’d guess a decision in China’s courts against Micron, if true, would have been trade war related. If so we could have a taste of what’s to come. If true it would slice revenues from Micron and potentially other companies. Our call last Monday to reduce China exposed stocks helps avoid situations like this. Micron is down 5.5% on the news and if the news proves true we’d guess it and other tech stocks will be down further.

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Tech Stock Focus: Semiconductor Chart Shows Downside

semiconductor stock chart
Source

The semiconductor stock index SMH (NYSEARCA:SMH) has been in a downtrend. You’d think semiconductor stocks should have benefited from Intel’s (NASDAQ:INTC) strong pre-announcement. The decline is likely driven by trade war fears.

Tech Stock Focus: SMH ETF Support Level $96

The chart above shows that key action over the last year formed a line of support around $96.

The current downtrend of the SMH ETF looks like the index is headed down to support. Unless we get a settlement of this trade dispute we could still have further downside.

Atlanta Fed GDPNow Estimates Slow

The Atlanta Fed predictions for Q2 had been 4.7%. The just-released expectation is now 3.8%. The drop could be tied to trade war fears. Businesses could start to reassess their plans for the year.

Auto Key Driver For Tech

GM, in fact just said tariffs could “lead to a smaller GM.” Hyundai said something similar.

The longer this now-global trade dispute doesn’t get settled, more companies like GM could pull back.

The auto industry has been a key driver for semiconductor companies as tech content per vehicle has been increasing.

Semiconductor companies also have some of the highest exposures to China of our tech stock coverage. A drawn out fight can hit the SMH ETF.

In speaking to the companies we’d guess nobody’s seeing a slowdown yet. But as business leaders read the news daily someone might blink which could start a domino of slower orders.

Our Take

Until this trade war sees some resolution we’re concerned that the semiconductor ETF SMH might not see support until $96.

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Trade Threat Peak This Week? Bullish

The initial $50B of tariffs that the US issued on Chinese goods was quickly answered by China with their own set of $50B of targeted tariffs.

What’s more interesting however is that the US’ latest threats of an additional $200B of tariffs have so far gone unanswered.

That is meaningful.

Cooler Heads?

President Trump’s negotiating tactics have been far from meeting traditional political protocol. Such a strategy worked to calm North Korea and may have settled China from upping the ante on trade tariffs.

China sits on a debt problem of their own. As tough as China talks they’d prefer to avoid an economic slowdown.

Negative Trade News Peak Behind Us?

We may be in the peak part of the tariff threats. If China can’t answer the $200B threat then hopefully the largest negative news hit is behind us.

Both countries are apparently racing to negotiate a trade accord ahead of month’s end.

So either we have a peak in the negative trade news cycle or the US and China could even come to terms some time in the next week. Both would be bullish for markets that sustained a tough weak following a cross fire of trade threats.

Tech And Trade

We pointed out that thus far tech companies’ goods have been mentioned far less in items listed for tariffs.

We also think we have increasing confirmation we are early in a tech boom. As long as trade tensions don’t escalate to much we think many tech stocks have big upside from here.

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We are long QQQ.

So Far Trade War Touches Tech Less

So far a majority of the products listed by the US and China have been in the agriculture and industrial segments. Officially, the war hasn’t centered on tech. Not yet.

Another consideration is much of production for major tech companies happens outside the US and China.

While a trade war would raise prices and potentially slow end demand, so far, tech could get hit less.

US And China Target Ag And Industrial


The lists of goods targeted so far by both countries have mostly been outside of tech (here and here).


Semiconductor Supply And Demand Is Global

Source

China and North America make up about one-fourth of global production.

China and North America make up roughly under one-third of global demand.

It’s meaningful but there is the chance that companies can shift production to lower cost regions if a trade war were to break out.

Economy Strong

A trade war would raise prices on goods making it more difficult for consumers to buy. The risk is a trade war slows the economy.

That said the economy has been picking up steam. The Atlanta Fed has been expecting a faster Q2 for US GDP.

There’s the chance that a trade war would slow that acceleration but doesn’t necessarily mean we fall into a recession based on that underlying strength.

We’re Still In Negotiation Mode

Both sides (China and the US) are positioning but also racing to come to an agreement. A trade war would hurt everybody and nobody wants it. The louder we hear the crossfire the more it likely means they are desperate to negotiate.

Tech Accelerating

We’ve shown that revenues of major tech companies are accelerating (here and here). Based on our work we think that continues this quarter.

Capex spend by hyperscalers, which is a huge tech driver has also been accelerating.

The backdrop for tech is very strong so if the trade war is muted against tech or settled we think tech has some big upside.

Q2 Same Thing

We’re bullish.  Based on our work speaking to many companies we feel Q2 can continue to see revenue acceleration which would drive earnings leverage.

If correct you have a big fundamental reason holding up stocks against trade war scares.

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All investments have many risks and can lose principal in the short and long term. The information provided is for information purposes only and can be wrong. By reading this you agree, understand and accept that you take upon yourself all responsibility for all of your investment decisions and to do your own work and hold Elazar Advisors, LLC, and their related parties harmless.

We have no positions in the securities mentioned.

Nobody Wants A Trade War

The stock market is down premarket thanks to a crossfire of tariff threats ahead of the g-7 meeting today.  The US announced tariffs and the receiving countries responded.

If anybody’s ever noticed this is President Trump’s modus operendi.  He announces hard initial strikes but follows with ingratiated, softer negotiations.

This style of negotiation hints that Trump’s G-7 tariff threats hope to lay the groundwork for countries to reach an agreement today and tomorrow.

Our Guess: Trump Wants To Come Away With Something

President Trump’s signature negotiating tactic (Strike hard first and negotiate softly after) helped him walk away with something from China just recently.  It helped Trump close a tax deal in the US.

Today’s ‘tariffs everywhere’ threats from President Trump probably never come to fruition but rather gets some gesture token of appeasement from the US’ G-7 allies.

If so, while the market looks down premarket from here, any agreement can jump the market after a weekend of negotiations.

Double Jump With North Korea Next Week

If correct about G-7 you could get a double jump in the market thanks to a potential peace accord with North Korea next week.

As we wrote yesterday, US and China approaching trade solidarity can pressure North Korea into feeling isolated creating a better chance for a peace deal.

That, along with a G-7 deal could be great for markets next week.

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All investments have many risks and can lose principal in the short and long term. The information provided is for information purposes only and can be wrong. By reading this you agree, understand and accept that you take upon yourself all responsibility for all of your investment decisions and to do your own work and hold Elazar Advisors, LLC, and their related parties harmless. Model portfolio trades and positions are hypothetical to be used for directional analysis and ratings purposes.