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May 10th, 2019

Market Sell-Off

By PRATTE

Blogue dec 1 EN

Difficult week for global markets as trade tensions rose a notch on Monday following a series of “tweets” issued by the US president. Investors first thought of a negotiating tactic from President Donald Trump. However, in the middle of the week, they began to fear reprisals from China. A tense climate that was reflected in the various world stock exchanges. Here is what happened this week in the markets.

Market Brief

On Sunday, the US president issued a series of “tweets” in which he threatened to raise tariffs. The publication of these “tweets” shook the markets on Monday. The Dow started the session down 450 points, the NASDAQ fell by 1.20% and the S&P 500 dropped 1.01%. Donald Trump, with these tweets, has added pressure on the ongoing negotiations. “The success (of Wall Street) this year is based on three elements: the turn of the US Central Bank to a more accommodating position, better-than-expected corporate earnings and the anticipation of a trade deal with China in the first trimester,” recalls Art Hogan of the National Investment Company. At the end of the day, the Dow managed to recover some of its losses, closing the session down 0.26%.

Most analysts had interpreted President Donald Trump’s latest comments as a tactic of negotiations. However, they began to worry on Tuesday after the confirmation of tarrifs by the chief US negotiator, Robert Lighthizer. This concern reflected in the markets and the three main indexes wavered in the red throughout the session. Several stocks sensitive to trade tensions fell during the session: Apple (-2.7%), Caterpillar (-2.3%) and Boeing (-3.9%). The semiconductor sector was also affected: Advanced Micro Devices fell 2.8%, Nvidia declined 3.8%, and Micron Technology declined 4.4%.

Same scenario on Wednesday at the opening, as the three main indexes began the day down to finally end the session in a scattered order. The Dow ended the session slightly up 3 points, the NASDAQ down 0.3% and the S&P 500 lost 0.2%. The Cboe volatility index, the VIX, which measures the 30-day implied volatility of the S&P 500, hit a new high of 23.38 on Thursday, its highest level since January 4. Again, on Thursday, several stocks suffered from trade tensions; Intel lost 6%, Nvidia fell by 4.4% and Micron by 3.5%.

The Chinese stock markets plunged on Thursday, shortly before the open of US markets, falling just hours before a meeting between Chinese and American negotiators. The Shanghai Stock Exchange fell 1.48% to 2850.95 points. Several stocks from Chinese companies were also down; Tencent fell 2.39%, Lenovo (computer manufacturers) lost 2.73% while the insurer AIA shrank by 3.42%. The three major US indexes continued their sell-off on Thursday early in the session shaken by the latest comments from Donald Trump. During a rally in Florida, he declared that China had “broken the deal.” The Dow fell more than 300 points just minutes after markets opened while the S&P 500 and the Nasdaq tumbled in the red.

“We are going to increase tariffs in China until they stop stealing our jobs,” the US president said Wednesday at a public rally in Florida. “China will not capitulate to the pressure and we have the determination and the means to defend our interests,” the spokesman for the Chinese Ministry of Commerce told Beijing. These statements disrupted markets around the world on Thursday.

Despite the entry in force of the new customs tariffs, the Chinese stock exchanges closed Friday session on the rise. According to analysts, Chinese investors had already “digested” the news and were optimistic regarding the maintenance of negotiations between the two countries. “These new US tariffs will not be applied to Chinese goods currently in transit,” which means “there is still a possibility that these tariffs will not be effectively enforced” as long as an agreement is reached in the next few weeks, given the transpacific transit times, notes Michael Hewson, broker analyst CMC Markets.

The losses on Friday were lower than expected, investors kept hope of an agreement between China and the United States. The Dow started the session with losses of 100 points, the S&P 500 fell 0.24% and the NASDAQ gave up 0.1%.

The TSX started the week down just like its American counterparts, shaken by the latest threats from the United States against China. It opened Monday session down 151 points and ended the day in the red. The TSX continued its decline on Tuesday, ending the day with a loss of 135 points. The health sector led the way down 2.2%, followed by technology, energy and industrial sectors. Shopify lost 2.54%, Crescent Point Energy was down 4.4%, SNC-Lavalin was down 4.13% and First Quantum Minerals Ltd. lost 5.9%. After two sessions down, the TSX managed Wednesday to end the day up 39 points, helped by the good performance of the black gold. The energy sector gained 1.7%, supported by Crescent Point Energy (5.2%).

Trade War

The trade war between the United States and China have disrupted markets and global trade for over a year now. Monday, the tension escalated once again, disturbing markets around the world. US President Donald Trump said negotiations between the two countries were not moving fast enough and decided to threaten China. He announced in a series of tweets on Sunday that he would raise tariffs from 10% to 25% on 200 billion on US Chinese products exported each year to the United States. “Tariffs will bring in FAR MORE wealth to our Country than even a phenomenal deal of the traditional kind. Also, much easier & quicker to do,” Trump tweeted, even though talks between Washington and Beijing are still “very pleasant.”

Recent data have shown that the trade war has greatly affected China’s foreign trade with exports down 2.7% year-on-year in April. Several studies that have been made since the introduction of the latest tariffs have revealed that despite the revenues earned by the US, it’s the American consumer who will pay the bill. “Tariffs are taxes paid by US companies and consumers, not by China,” warns David French, a leader of the US Retailers Federation (NRF). La Presse’s article (link available in the title) helps to better understand this reality.

Lyft

The company unveiled its first earnings this week since its IPO last March. It announced on Tuesday losses of more than a billion dollars. Lyft has invested a lot of capital in its business over the last few months, its expenses have exploded by more than 200% in one year. Lyft, however, nearly doubled its revenues to $776 million, up 95 percent from last year.

The company has managed to increase its number of users with more than 20.5 million compared to 14 million in the previous quarter. Lyft also announced on Tuesday a partnership with Waymo, a subsidiary of Google that produces autonomous cars or “robot taxis” that will soon be available on Lyft’s platform. The stock is down 20% since last month and trading $13 lower than its initial IPO price. As a result of this news, Lyft’s stock was down 3% after the closure of Wall Street.

 

Pratte Portfolio Management is a firm registered with the Autorité des marchés financiers (AMF) and the Ontario Securities Commission (OSC).
Intended to provide general information about markets and securities and not to meet your specific needs, this report is the result of the author’s only work. The opinions (including any recommendations, if any) expressed in this report are those of the author only and do not necessarily represent those of Pratte Portfolio Management and do not constitute securities investment advisory activities designed to meet your specific needs.
The information contained in this report is derived from sources believed to be reliable, but the accuracy and completeness of this information can not be guaranteed and, in providing the information, the author and Pratte Portfolio Management assume no liability whatsoever. This information was current as of the date indicated in this bulletin, and neither the author nor Pratte Portfolio Management assumes any obligation to update it or to report any new developments with respect to this information. This report is intended for distribution in jurisdictions where the author and Pratte Portfolio Management are registered for trading in securities. Any distribution or diffusion of this report in another territory is forbidden. The author, Pratte Portfolio Management, its affiliates and their respective directors, officers and employees, and the companies with which they are associated may, from time to time, hold securities referred to in this report.
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