Following the recent collapse in trade negotiations between the U.S. and China, investors spent the week mulling over renewed concerns of a full-blown trade war. The two parties looked close to a deal a few weeks ago, but the situation has rapidly deteriorated since. Semiconductor stocks bore the brunt of this week’s selloff down about 6%. Oil suffered its worst day of 2019 and other commodities also took a hit. Safe havens like gold and bonds finished the week in the green.
In the ongoing game of chess, a new pawn has emerged as both sides upped the ante in the trade war this week. Deep rooted issues are now surfacing around American intellectual property, economic espionage, Huawei, and the global implications for the race to 5G.
S&P 500: 2826 (-1.17%)
FTSE All-World ex-US (VEU): (-.16%)
US 10 Year Treasury Yield: 2.32% (-.07)
Gold: $1,285 (+.57%)
EUR/USD: 1.1204 (+0.41%)
- Monday – Tesla shares dropped below $200 for the first time since 2016 after a notoriously bullish analyst called Tesla’s problems a “code red situation”.
- Tuesday – Home Depot reported earnings that exceeded expectations and reaffirmed 2019 guidance.
- Wednesday – the Fed minutes were released that reaffirmed the Fed’s patient approach of no rate moves “for some time” and suggested current low inflation is likely transitory.
- Thursday – A $16 billion aid package was announced as an effort to ease the toll from ongoing trade disputes for American farmers.
- Thursday – The House passed a bill that would make significant changes to the U.S. Retirement System such as removing the age cap for contributing to IRAs and making it easier for employers to offer 401(k) plans.
- Friday – U.K. Prime Minister Theresa May announced her resignation set for two weeks out, clearing the pathway for new leadership to takeover Brexit negotiations.
Our Take: What’s The Deal With Huawei?
First, let’s take a step back to what happened recently to get us where we are. A few weeks ago, negotiations were set back when China drastically revised the draft agreement language. China removed previously agreed-upon commitments to update Chinese laws around protecting intellectual property and the forced transfer of technology from American companies to Chinese firms.
This was followed by the two sides slapping additional tariffs on each other. President Trump then took it up a notch by barring American companies from using foreign-made telecommunication equipment that could pose a threat to national security, adding Huawei and other Chinese companies to the blacklist.
Why the ban? China has a long history of intellectual property theft — in 2015, the Federal Reserve Bank of Minneapolis determined that over half of all technology owned by Chinese firms was obtained from foreign companies. In 2017, U.S. officials found strong evidence of government-forced technology transfers and cyberattacks supported and conducted by China. It’s estimated that this cost U.S. companies $50 billion in lost earnings, and a follow up investigation in November 2018 found China was continuing its unfair IP policies.
Now, back to Huawei, which has become a major player in the trade war saga. If we take a brief look at the history of the company, it’s easy to understand how it suddenly became a key pawn in this chess game. Huawei Technologies is one of the world’s biggest private companies — it’s currently the largest global telecom supplier and second largest smartphone maker in the world. Speculation has long been rife about the company’s Chinese government ties and potential security threats associated with their products. Several cases and investigative reports have popped up over the years around copyright infringement, stolen intellectual property, and stolen trade secrets from U.S. Companies. Vodafone reported in April that they found hidden backdoors in Huawei equipment according to a report, but it was unclear if it was an oversight or purposeful. Europe is Huawei’s biggest foreign market, and several European companies have now followed suit on the U.S. ban.
Huawei networking equipment has been banned in the U.S. since 2012, but the Chinese tech giant still uses U.S. Chips and Google’s Android Software to operate their phones. Huawei is the front runner in the global race to 5G, but requires U.S. technologies to remain in the lead. This has suddenly come into question with the trade war, so there is leverage here, and President Trump hinted at that this week saying Huawei could be included in a deal to end the stalemate.
Optimism over a near-term resolution has waned with the real underlying complexities driving the trade war coming to light this week. It is unclear if President Xi’s renege was due to political pressure or if it was a calculated move, but President Trump made it clear he wouldn’t accept a surface level agreement even in the face of elections and was willing to raise the stakes. The market has not yet priced in the effects of a full-blown trade war, but the odds have increased. Volatility will likely pick up with any further deterioration in the situation.
Concerned about market volatility? Here’s a primer on how to react when things get rocky.