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Truce? What Truce? Stocks Dive on Trade Angst

The “trade truce” between the U.S. and China that was ballyhooed yesterday by Trump administration officials? The truce that financial news anchors breathlessly heralded as a tailwind for stocks?

It lasted about 24 hours.

Today, the world’s two largest economies again manned the trade barricades, pushing the main stock indices deeply into the red. U.S.-based, export-dependent manufacturers were among the biggest losers.

The White House cheered investors Monday with conciliatory words on trade. But turning words into deeds is a different matter. Negotiations today between the U.S. and China took a turn for the worse.

The talks started auspiciously enough. Reports surfaced Tuesday morning that China and the U.S. were close to cutting a deal that would prevent China-based ZTE (OTC: ZTCOY) from going out of business. A trade dispute over the telecom equipment maker was initially sparked when the Commerce Department banned U.S. companies from selling to ZTE for seven years after it violated sanctions against North Korea and Iran.

Under the proposed deal floated today, the U.S. would lift the ban. ZTE would be compelled to make major management changes and potentially face heavy fines. In return, China would cut tariffs on imported cars from 25% to 15% on July 1.

So what happened? Let’s turn to a member of President Trump’s own party, conservative U.S. Senator Marco Rubio (R-FL), who tweeted the following today:

If this is true, then administration has surrendered to #China on #ZTE. Making changes to their board & a fine won’t stop them from spying & stealing from us. But this is too important to be over. We will begin working on veto-proof congressional action.

Other leading members of the Senate also expressed outrage and vowed action to block the deal. In response to the bipartisan backlash, President Trump this afternoon suddenly insisted “there is no deal” and added “we’ll see what happens.”

The major averages were edging higher earlier in the day on the news of an impending trade deal, but after Trump’s impromptu remarks, stocks quickly turned south and losses accelerated in the final hour of trading. Hello chaos, my old friend.

The long view on crude oil…

Sharing center stage with trade is crude oil.

After several days of steady gains, crude oil prices took a breather today and closed mixed. West Texas Intermediate, the U.S. benchmark, fell 0.44% to close at $72.03 per barrel. Brent North Sea crude, on which international oils are based, rose 0.18% to close at $79.36/bbl.

Strong global demand, combined with a production curtailment deal forged by OPEC and Russia, have diminished the global oil glut and pushed prices higher this year.

The White House implemented new sanctions on Venezuela in the wake of Sunday’s re-election of authoritarian leftist President Nicolas Maduro, a move that will further impede the country’s oil output. Imminent sanctions on Iran, following America’s withdrawal from the international nuclear deal with that country, also will reduce global supplies.

Venezuela and Iran are members of OPEC. As they get relegated to the sidelines, the oil cartel will start over-delivering on its production cut agreement. That said, OPEC leader Saudi Arabia is unlikely to use the opportunity to throw open the spigots. Memories of the 2014 price collapse still haunt producers.

It’s not just China, Venezuela and Iran. America is turning the screws on its traditional allies as well. The European Union’s latest proposals to loosen up restrictions against U.S. products, notably automobiles, have failed to impress Washington.

EU officials said Tuesday that the Trump team still refuses to remove the threat of import tariffs on EU-produced steel and aluminum. Trump has proposed tariffs of 25% on steel and 10% on aluminum but has granted EU producers an exemption until June 1 pending the outcome of negotiations. Those talks aren’t going well, either.

The betting in Brussels is that by June 1, the U.S. and Europe will be at an impasse. European leaders are scratching their heads, puzzled as to why America is treating western liberal democracies as the enemy.

With all these headwinds, do we face a bear trap? Economic data on the docket in the days ahead should provide clues:

Wednesday: MBA Mortgage Applications; Purchasing Managers Index (PMI) Composite Flash; New Home Sales; U.S. Energy Information Administration (EIA) Petroleum Status Report.

Thursday: Jobless Claims; Federal Housing Finance Agency (FHFA) House Price Index; Bloomberg Consumer Comfort Index; Existing Home Sales; EIA Natural Gas Report.

Friday: Durable Goods Orders; Consumer Sentiment; Baker-Hughes Rig Count.

As I’ve just explained, geopolitical risks are intensifying. What’s an investor to do? First, consider doing nothing. Admittedly, that’s a hard concept to embrace.

On my nightstand at home, scattered among the books on finance, you’ll also find books on Eastern philosophy. The ancients of the Far East teach the wisdom of “non-action,” and right now it makes sense to simply sit tight.

By all means, stay invested. But elevate cash levels. When the next sell-off occurs (and believe me, it’s on the horizon), you’ll have sufficient money on hand for bargain hunting.

Tuesday Market Wrap

  • DJIA: -0.72% or -178.88 points to close at 24,834.41
  • S&P 500: -0.31% or -8.57 points to close at 2,724.44
  • Nasdaq: -0.21% or -15.58 points to close at 7,378.46

Tuesday’s Big Gainers

  • America’s Car Mart (NSDQ: CRMT) +14.53%

Auto retailer excels on operating results.

  • Photronics (NSDQ: PLAB) +7.69%

Semiconductor photomask maker beats on earnings.

  • Ferroglobe (NSDQ: GSM) +4.23%

Specialty metals maker posts strong quarter.

Tuesday’s Big Decliners

  • Dycom Industries (NYSE: DY) -20.30%

Telecom infrastructure firm lowers guidance.

  • Toll Brothers (NYSE: TOL) -9.60%

Homebuilder disappoints on earnings.

  • Cameco (NYSE: CCJ) -6.55%

Analysts turn bearish on uranium miner.

Letters to the Editor

“What’s an effective hedge against a possible trade war?” — Kyle M.

Consider U.S.-based small caps. The key is to find smaller American companies that benefit from domestic economic growth, but aren’t major exporters in the manufacturing sector. With limited exposure to overseas turmoil, these firms are positioned to profit as the U.S. economic recovery stays on track.

Questions about small-cap stocks? I’m here to help:

John Persinos is managing editor of Personal Finance and Radical Wealth Alliance, as well as chief investment strategist of Breakthrough Tech Profits.


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