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What can the US-China Trade War Ceasefire Mean for Stocks

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The S&P 500 extended last week’s rally by 1.1{d745bfe1f0a8cfaf7934723e820c1a1fdf298af2e9634a8abb073c3029806a15} on Monday, as investors breathed a sigh of relief that US-China trade war/relations did not worsen over the weekend. Meanwhile, the Dow Jones Industrial Average gained 1.1{d745bfe1f0a8cfaf7934723e820c1a1fdf298af2e9634a8abb073c3029806a15}, the Nasdaq Composite gained 1.5{d745bfe1f0a8cfaf7934723e820c1a1fdf298af2e9634a8abb073c3029806a15}, and the Russell 2000 gained 1.0{d745bfe1f0a8cfaf7934723e820c1a1fdf298af2e9634a8abb073c3029806a15}.

President Trump and President Xi agreed at their Saturday dinner meeting to delay further tariff actions for 90 days, during which time further negotiations will be carried with an aim of trying to settle disagreements over fundamental trade issues. National Economic Council Director Larry Kudlow told reporters the 90-day clock will start with the start of the new year and expects changes across a broad range of issues to happen “very quickly.”

Stocks retreated from their best levels, though, reined in by an underlying sense that the morning’s positive reaction to the Trump-Xi agreement to suspend further tariff actions was probably an overreaction since nothing concrete was achieved in terms of resolving the most important fundamental trade issues between the two countries. Also, the spirit of moving the tariff rate to 25{d745bfe1f0a8cfaf7934723e820c1a1fdf298af2e9634a8abb073c3029806a15} (from 10{d745bfe1f0a8cfaf7934723e820c1a1fdf298af2e9634a8abb073c3029806a15}) on $200 billion of Chinese goods continues to hang there like a stick in the event an acceptable deal to the US is not struck within the 90-day deadline. What does this 90-day cease-fire really mean? Perhaps, it provides the grounds for some fruitful discussion between the two parties. 

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Nonetheless, the stock market still had a solid day with the energy (+2.3{d745bfe1f0a8cfaf7934723e820c1a1fdf298af2e9634a8abb073c3029806a15}), consumer discretionary (+2.2{d745bfe1f0a8cfaf7934723e820c1a1fdf298af2e9634a8abb073c3029806a15}), information technology (+2.1{d745bfe1f0a8cfaf7934723e820c1a1fdf298af2e9634a8abb073c3029806a15}), and material (+1.8{d745bfe1f0a8cfaf7934723e820c1a1fdf298af2e9634a8abb073c3029806a15}) sectors outperforming the broader market.

WTI crude bounced 4.3{d745bfe1f0a8cfaf7934723e820c1a1fdf298af2e9634a8abb073c3029806a15} to $53.06/bbl to help lift the oil-sensitive energy group. Adding to crude’s advance was an upbeat growth perspective from the trade ceasefire and Canadian province Alberta’s decision to cut oil production by 325,000 barrels per day, or 8.7{d745bfe1f0a8cfaf7934723e820c1a1fdf298af2e9634a8abb073c3029806a15}, starting in January to help curtail excess supply. Separately, Qatar surprisingly announced plans to withdraw from OPEC to focus on gas production; Qatar has been a member of OPEC since 1961.

Within the consumer discretionary space, heavyweights Amazon (AMZN) and Nike (NKE) helped carry the sector with strong gains of 4.9{d745bfe1f0a8cfaf7934723e820c1a1fdf298af2e9634a8abb073c3029806a15} and 3.8{d745bfe1f0a8cfaf7934723e820c1a1fdf298af2e9634a8abb073c3029806a15}, respectively. Auto stocks also had a solid showing amid some trade tension relief.

President Trump tweeted Sunday evening, “China has agreed to reduce and remove tariffs on cars coming into China from the US Currently the tariff is 40{d745bfe1f0a8cfaf7934723e820c1a1fdf298af2e9634a8abb073c3029806a15}.” The expectation is, as stated by Larry Kudlow the tariffs are to be reduced to zero. This was good news for the two car giants Ford Motor (F) and General Motors (GM) added respective gains of 2.0{d745bfe1f0a8cfaf7934723e820c1a1fdf298af2e9634a8abb073c3029806a15} and 1.3{d745bfe1f0a8cfaf7934723e820c1a1fdf298af2e9634a8abb073c3029806a15}, despite the negative news surrounding GM these recent weeks regarding shutting plants and cutting workers.

Chip stocks also had a distinctly strong performance on Monday, as the Philadelphia Semiconductor Index rose 2.7{d745bfe1f0a8cfaf7934723e820c1a1fdf298af2e9634a8abb073c3029806a15}. Advanced Micro (AMD) closed up +11.3{d745bfe1f0a8cfaf7934723e820c1a1fdf298af2e9634a8abb073c3029806a15}, providing strong support for the index and the tech sector. Apple (AAPL) also contributed to the tech sector’s advance with a strong gain of 3.5{d745bfe1f0a8cfaf7934723e820c1a1fdf298af2e9634a8abb073c3029806a15}.

Conversely, the real estate (+0.4{d745bfe1f0a8cfaf7934723e820c1a1fdf298af2e9634a8abb073c3029806a15}), communication services (+0.1{d745bfe1f0a8cfaf7934723e820c1a1fdf298af2e9634a8abb073c3029806a15}), and consumer staples (-0.1{d745bfe1f0a8cfaf7934723e820c1a1fdf298af2e9634a8abb073c3029806a15}) sectors finished at the bottom of the sector standings. Notable laggards from each respective sector included American Tower (AMT) down -0.9{d745bfe1f0a8cfaf7934723e820c1a1fdf298af2e9634a8abb073c3029806a15}, Verizon (VZ) down -3.6{d745bfe1f0a8cfaf7934723e820c1a1fdf298af2e9634a8abb073c3029806a15}, and PepsiCo (PEP) down -2.4{d745bfe1f0a8cfaf7934723e820c1a1fdf298af2e9634a8abb073c3029806a15}. Verizon (VZ) was downgraded to ‘Neutral’ from ‘Overweight’ at JP Morgan, which played a role in its decline.

In M&A news, pharmaceutical company Tesaro (TSRO) soared 58.5{d745bfe1f0a8cfaf7934723e820c1a1fdf298af2e9634a8abb073c3029806a15} after it agreed to be acquired by UK-based GlaxoSmithKline (GSK) for roughly $5.1 billion. Also, Tribune Media (TRCO) gained 11.7{d745bfe1f0a8cfaf7934723e820c1a1fdf298af2e9634a8abb073c3029806a15} after Nexstar (NXST) agreed to acquire the media company for $46.50/share in a cash transaction that is valued at $6.4 billion.

Separately, US Treasuries had a much better day than many participants might have expected in the face of some optimism in the stock market. The 2-yr yield added one basis point to 2.82{d745bfe1f0a8cfaf7934723e820c1a1fdf298af2e9634a8abb073c3029806a15}, and the 10-yr yield lost two basis points to 2.99{d745bfe1f0a8cfaf7934723e820c1a1fdf298af2e9634a8abb073c3029806a15}. Meanwhile, the US Dollar Index declined 0.3{d745bfe1f0a8cfaf7934723e820c1a1fdf298af2e9634a8abb073c3029806a15} to 96.99. The resiliency of the Treasury market reflected a more practical awareness that an agreement to keep talking is still a long way from an economically-material solution on major trade issues.

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Dr. Tiam Feridooni

Written by: Dr. Tiam Feridooni MD, PhD, BSc Dr. Feridooni, graduated from Dalhousie Medical School in May, 2018. Prior to enrolling in medical school, he completed his Bachelor of Science with Honours in 2010 in Biochemistry. He then obtained his PhD at Dalhousie University in Pharmacology in 2014, with a focus around regenerative medicine and stem cell transplantation. Dr. Feridooni has been published numerous high impact journals and has also co-authored a few books.

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