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May 24th, 2019

Trade War Dominates Markets

By PRATTE


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Another week ruled by the “trade war” as the United States continues to threaten China and its companies. It was Huawei’s turn this week to suffer the repercussions of trade tensions. Indeed, the United States has been suspecting espionage on behalf of Beijing. They have also banned US telecom companies from doing business with them. Here is what happened this week in the markets.

Market Brief

On Monday, the latest US threats against the Chinese giant Huawei upset the markets. Indeed, investors have expressed concerns regarding the impact of these threats on the technology sector. The United States has banned US telecom companies from doing business with foreign companies deemed “risky” for the country’s security. Google (-2.06%) has announced it would stop doing business with Huawei. According to Bloomberg, several major US suppliers such as Intel microprocessor giants (-2.96%), chip maker Qualcomm (-5.99%) or Broadcom (-5.97%) also announced they will no longer do business with the company. The semiconductor sector, which had been one of the best performing since the beginning of the year, was retreating at the end of the day. The NASDAQ ended the day down 1.46%, the Dow lost 0.33% and the S&P 500 gave up 0.67%.

After two consecutive sessions down, US markets opened up on Tuesday. The United States announced it would leave some time for Huawei to get organized, allowing markets to catch their breath. The Americans made this decision after many users and businesses were worried about the threats. Thus, for the next three months, Huawei will be able to use US components and software before the implementation of sanctions. This will allow the company and its partners to adapt themselves.

Wall Street was back down on Wednesday as commercial tensions continue to worry investors. The fall of Qualcomm’s stock (-9.97%) pulled markets down. The collapse of its stock came as a result of news that a California judge had accused the company of “strangling the competition”, condemning the firm for anti-competitive practices in the mobile-phone microprocessors sector.
The Dow dropped 400 points when opening on Thursday, the NASDAQ and the S&P 500 also retreated. In addition, many companies announced the suspension of their deals with giant Huawei on Thursday adding new concerns surrounding the trade war. A session that ended in the red for the majority of global stock indexes. The Dow lost 286.14 points, the S&P 500 fell 34.03 points and the NASDAQ lost 122.56 points. In Paris, the CAC 40 index dropped 1.81% and in Hong Kong, the Hang Seng index dropped 1.58% while the oil fell by 5.7% to 57.91 dollars in the United States, while the Brent, listed in London, dropped 4.55% to 67.76 dollars.

Wall Street opened up on Friday, as investors became more optimistic following President Trump’s latest comments that the trade war could end soon.

The Toronto Stock Exchange was closed Monday for Victoria Day. The TSX finished slightly higher Tuesday, unable to earn more points as the price of oil retreated. Difficult session for the Canadian index Wednesday who lost more than 100 points at the close while three of its main sectors were down. The energy sector lost more than 2.67% pulled down by the price of oil and the materials sector lost 2.0%. The financial sector yielded 0.65% after a bad quarter from CIBC (-4.4%). The trend continued Thursday at the open of markets as oil prices continued to plummet. The TSX ended the session at its worst level since the beginning of the year, losing 162.74 points pulled down by the energy sector. Canada’s main stock index was up at the open on Friday, with bank and cannabis stocks leading the way.


Tesla

The company’s stock fell on Thursday to its lowest level since December 2016, trading below the symbolic threshold of $200. Its market value also fell from 65 billion in 2018 to 35 billion on Tuesday. An email sent by Elon Musk last week asking employees to limit spending due to the company’s precarious financial situation has added concerns regarding the company’s profitability. “This is a wake-up call on the liquidity problems that many observers thought were resolved with the raising of capital,” he told AFP. It also suggests “that second-quarter car sales may not have rebounded as sharply as promised by the group”.

Tesla has reported losses in its latest quarterly results as many questions the financial profitability of the company, especially since it announced that it had made less delivery than expected. Moreover, several analysts have cut down the price target of the automaker, with the result of a 3% drop of the stock Wednesday. However, Tesla still hopes to return to profitability next quarter. The stock has already lost more than 19% in May, following the 15% drop in April and 12.5% in March.

Qualcomm

The stock of the world’s largest manufacturer of smart phone chips and modems tumbled on Wednesday after being convicted by a California judge for anti-competitive practices. “Qualcomm’s licensing practices have strangled competition for years in key segments of the microprocessor market for mobile telephony (modem chips or connection chips),” the judge wrote. Qualcomm “harmed its rivals, manufacturers and consumers by doing so”.

The judge demands that Qualcomm renegotiate its contracts “in good faith” and “without threat of cutting off supply or other discriminatory clauses”. The company purposely inflated its licence prices and then threatened its customers to no longer provide them with electronic components if they did not also buy the licences. This decision comes a few weeks after its agreement after a long legal battle with Apple who has finally agreed to use Qualcomm chips in its iPhone again, replacing Intel. Qualcomm’s stock went up 35% after the agreement but lost 10% Wednesday after the ruling.

IMF warning
The International Monetary Fund (IMF) has warned China and the United States that the trade war could jeopardize the global economic recovery expected for the second quarter of 2019. “Although the impact on global growth is for the moment relatively modest, the new escalation could seriously deteriorate the business climate and the confidence of the financial markets, disrupt the production chains and jeopardize the resumption of global growth expected in 2019” said Thursday Gita Gopinath, the chief economist of the IMF.

Several companies have expressed concerns about the new tariffs. For example, shoe manufacturers (Adidas, Nike, Puma and Steve Madden) have asked President Donald Trump to “immediately” remove shoes from the list of manufactured goods that may be subject to tariffs. It is mainly US companies that pay almost all of Donald Trump’s tariff costs on imports from China, IMF researchers said, challenging the president’s claims that China is paying the bill.

 

 

 

 

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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