Long, drawn-out and hard-lining have characterised the US-China trade negotiations; and the financial markets are beginning to send a message of discomfort on the course of the ongoing talks. But while trade war headlines dominate the wires, some background events are making up for the perfect storm in these markets. China and the trade wars could well just be distractions for a market that is fundamentally poised for a Spring crash.
Below is a summary of the performance of some of the most important economic sectors that may signal the future risk sentiment of investors:
Technology has been the markets’ pacesetter in 2019, posting the best performance year-to-date. But the wheels are cooling off, with investors showing preference for safer options. It might be far from a reversal, but investor caution has been inspired by a slowdown in revenues and weak guidance from some of the big names.
The US blacklist of the China tech giant, Huawei, was partly the reason for the extended slump. Huawei is the world’s second largest phone maker and it consumes a lot of US tech parts. The potential loss of an entire revenue stream for some of the big names has inspired investor flight on the sector.
But this is not the first time that the Trump government is blacklisting a Chinese tech company. In April 2018, the US served a somewhat similar ban on ZTE, a move that crippled the operations of the company. Ultimately, ZTE settled for a fine and a 10-year probationary period, with Trump managing to bring China back to the negotiating table. Could the recent Huawei ban be another Trump tactic for leveraging the trade talks? Maybe yes, maybe not.
It is important to note that Huawei is a different monster to ZTE. As mentioned, it is the world’s second-largest mobile handset provider and it is also a major technology infrastructure provider, particularly as far as 5G is concerned.
The relevant point is that Huawei can fight back, of course, through China. Most US companies are exposed to the Asian giant, with most building a majority of their parts in the nation.
The cost for these companies to switch to ‘friendly’ nations, will likely hit their margins very hard. With the trade war fears spilling over to private companies, the tech sector might witness more volatility in the coming days. Investors and analysts are keeping a close eye on what the stock market reaction will be.
Housing is a key economic indicator, and one of the main pointers of consumer discretionary spending power. Spring is traditionally the warm season for housing, but the sector is seeing no sunshine. The sector has been the weakest performer during the Trump era.
Home sales have been weakening for 14 months in a row, while pending home sales are sending mixed signals. Pending home sales started the year on a very weak note, but surged slightly in March, before resuming a sideways trend. The surge was brought about by a sharp drop in mortgage rates.
The rates have since eased higher, coinciding with the weak demand. Such sensitivity to the rate denotes a struggling consumer. Previously, when housing starts, building permits and new home sales trended downwards, and it was a signal for the beginning of a recession. Only new home sales are trending sideways and lower, and a turn to the red will complete the perfect signal for a cooler Spring.
The labour market has been a positive factor for the macroeconomic picture during the Trump era. The positive data for the sector has helped the Trump argument that his administration’s tariffs are helping American jobs.
Since his first tariff imposition on Chinese goods back in April 2018, the US economy has added about 2.6 million new jobs, including about 250,000 jobs in the manufacturing sector. The sector lost over 5 million jobs during 2000-2009, a situation Trump has conveniently blamed on the free pass the US gave to Chinese trade.
But beyond jobs, the debate is on wages. Wage growth during the trade tension period has averaged at 3.2%, with the relevant manufacturing sector actually lagging the national average at 2.3%.
But if the trade war heightens, consumer prices on affected goods will rise, and there will be more pressure on the American buyer. Put simply, wages have not risen according to expectation and the average American household will start feeling the heat, sooner rather than later.
The escalation of verbiage and actual action in the US-China trade war has, predictably, increased uncertainty in the markets. Investors shy away from uncertainty, and the equity market is facing a possible Spring crash in one of its traditionally shinier months. But as investors wait for a little clarity, which seems far away, other economic factors paint a worrying picture.
The foremost technology sector is slowing down, while housing has been depressed for a couple of months now. Labour is the only bright spot, but weak growth in wages is threatening to only pressure the American consumer further if the trade rhetoric continues. With the other fundamental factors looking to provide headwinds, the continuing trade war headlines may soon provide the last shove that would push the markets off the cliff.