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China, US Running Down Trade War Targets, Including Oil. Market Dips

07/11/2018 5:14 am EST

Focus: MARKETS

Gene Inger

Editor, The Inger Letter

Erratic reallocation might be just jitters on tariffs, or issues surrounding President Trump’s profound rigidity when it comes to dealing with Europe, much less not simplifying the Chinese trade relationship, writes Gene Inger.

Make a deal and say things wouldn’t be so bad if the iPhone alone didn’t contribute sizeable distortions to the actual trade relationship. Move iPhone production over to Taiwan or the USA and China goes crazy.

So many firms are really involved in China now. BMW is expanding big-time, even though Tesla (TSLA) is all you hear about in U.S. media.  Conventional tariff impositions merely do throw things off-balance, and into uncertainty that the markets don’t like. But in the final analysis, guess what? The two nations must resolve this.

Of course, the risk now is not just that Trump is ready to list a huge rise in Chinese tariffs, but that a serious move on taxing U.S. oil by China could not only throw a wrench into this battle. We’ve already noted the Chinese actually have more cards to play than is generally acknowledged by the administration. The Chinese could actually invite purchases from Iran.  

That’s headline risk at the moment for the market, but it matters.  We actually might not hit 2800 on Sept. S&P. And that any breakout above 2800 would be a fake-out anyway.

This is a tricky market. I am not in the perennial bear camp that constantly calls for catastrophe, nor do I agree with former government officials now proclaiming that a trade war is a war that cannot be stopped. Really? It can end with a series of agreements almost overnight. It’s not that the permabears don’t have a point, but it’s the same debt-based or whatever they can come up with for eons for a break.  

AP: After first week, no one sees clear path to trade peace.

Bottom line: the Chinese oil story is timed to hit when Trump’s distracted by his trip to Europe, where he becomes a distraction for PM Theresa May, already distracted by upheaval in her own Conservative Party over Brexit.

And it’s hard to know if the purported new tariffs were decided while he was on the way to Brussels or before. Regardless, the rallies in the market are clearly fake-out moves, with desperate efforts Monday and Tuesday to rotate into less dangerous stocks than the incredibly bloated FANGS and so on.  

You can’t yet quantify the Chinese impact. In our view any one of these rallies can be the final one before we get a more notable decline for the primary market indexes.

Imposing heavier tariffs superficially seems wrong, but might prove to be how we get some concession from Beijing. The way it’s being done is the opposite of personal diplomacy between the leaders.  

As much as I believe Apple (AAPL) is making proper moves in their business mix (the ecosystem and services), if China were to even threaten the iPhone, you’d get a huge plunge straight-away.

Honestly the Chinese are so tied to global trade and the USA that this is all a bit late to be occurring. It’s an effort to counter Chinese opportunism (to be kind) I have warned about for (seriously) over 30 years now. I’m not sure it’s just a better late than never situation. At least maybe we’ll get IP theft relief.  

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