`Primal Desire' and `Stumbled Face First': Analysts Talk Trade

(Bloomberg) -- Stocks are sliding and bonds are rallying as fears mount about an escalating U.S.-China trade conflict. Some Wall Street analysts are raising concern about the impact of a full-blown trade war, but others, like Height Capital Markets, are confident President Donald Trump is taking an aggressive stance now to force China “to back down quickly.”

Trade-sensitive companies like Boeing Co. and Caterpillar Inc., China-exposed stocks like Acacia Communications Inc. and NXP Semiconductors, and steel producers and metals companies like Alcoa Corp. and United States Steel Corp. are among the hardest hit in New York trading, while the Dow Jones Transportation Average is down 1.9 percent, the most since May 3.

Here’s a sample of analyst commentary:

BMO, Ian Lyngen

“The progression from trade rumblings, to trade tensions, to trade saber-rattling, to trade tantrum, to trade tiff, has escalated yet again.” Instead of “inching toward a trade war” with a series of new taxes and trade-agreement re-negotiations, “we might just have stumbled face first into one.”

“Most economists have been unwilling to assume real GDP will be materially impacted by the growing array of trade disputes – primarily because $50 billion to $200 billion is a drop in the vast ocean that is the U.S. economy. Of course, there is a point at which the numbers start to have a more meaningful influence and more importantly, we find ourselves worried about the fallout for business confidence.”

“While second quarter GDP is currently on track to print near 5 percent, the market is already looking beyond the present state and toward the ramifications from the growing sense of apprehension attributable to the trade saga.”

Read More: Tesla and GM Are Collateral Damage in Trump-Versus-Xi Trade War

Height Capital Markets, Clayton Allen

By adding tariffs, Trump “clearly shows both his strategy and weakness. His strategy, now clearer than ever before, appears to hinge on the idea that the U.S. has the upper hand by virtue of its larger import value, and continued threats to target those imports give the U.S. significantly more leverage than China.”

That “also exposes Trump’s weakness: He must apply his leverage as soon as possible to avoid negative repercussions from a drawn-out trade dispute. These negative repercussions span a broad spectrum, extending from the risk of domestic political backlash, to the risk of decreased Chinese cooperation on North Korea, to the outside possibility that China will move to test U.S. mettle with regional security alliances.”

“We think this action is the first in a series of aggressive moves by Trump that are all aimed at forcing China to back down quickly, which is likely exactly what Trump meant when he said that ‘trade wars are good and easy to win.’”

Cowen, Chris Krueger

“There is really no way we see Congress limiting Trump on this course of action. Trump is doing what he said he would do: ‘Trade wars are good, and easy to win.’”

“The fundamental question on U.S.-China trade for us remains: Is there a strategy to address the underlying problems and inequities with U.S.-China trade or is this just a Trump primal desire to punish and scream? We hope for the former though fear the latter.”

Stifel, Lindsey Piegza

“We estimate tariffs on goods both ways would likely shave off a few tenths of a percentage point off each country’s GDP.”

“While a seemingly minimal impact, as the domestic economy continues to struggle to maintain a near 2 percent growth rate, a loss of even a few tenths is an unwelcome impact. Additionally, the fear from here is a continued back and forth, escalating trade penalties on both sides with a further negative impact on growth.”

Horizon, Greg Valliere

“If [Trump] continues to double down on trade with China ... it may dampen the euphoria – and predictability – that corporate America enjoyed after last year’s tax cuts and regulatory reform. Republicans we’ve talked with are dismayed.”

“There’s an unusually unstable political climate in Washington, even by recent standards. Is it any surprise that the investment safe haven is Treasuries, which have rallied? Yields continue to slip, even as GDP growth approaches 4 percent.”

Raymond James, Ed Mills

“The escalating set of tariffs on Chinese goods come as the Treasury Department is developing a set of investment restrictions/export controls on Chinese investment in certain industries and U.S. technology (due June 30). The latest tariff threats demonstrates Trump’s frustration with the current state of negotiations with China, significantly increasing the likelihood that Trump will seek to use these investment restrictions in an attempt to bring China to the negotiating table.”

FTN, Jim Vogel

“Bottom Line: The markets’ reaction to accumulating trade spats is an awareness that at a minimum, trade leverage will not be growing. It will probably shrink, reducing total net stimulus where investors had been expecting the benefits of fiscal stimulus and very gradual tightening in Europe.”

“The most likely outcome for bond investors is a much longer delay in the long-predicted increase in interest rates. The Fed won’t be swayed by any trade analysis that isn’t mathematically precise, so it would only slow rate hikes if it concludes financial conditions have worsened (Narrator: They haven’t).”

©2018 Bloomberg L.P.

Bloomberg
Stay Updated With Stock Market News on BloombergQuint