TRADE WAR REDUX?

Tough trade talk is again knocking the stock market around this morning. The Dow is currently down 440 pts and the SPX is off 1.6%. All eleven market sectors are in the red, let by tech (-2%). Several industry groups are down more than 2%, including semiconductors, transports, and biotechs. The VIX Index, a measure of investor fear, jumped to 20 for the first time since January. European stock markets closed down by 1-2% in today’s session. Obviously, crude oil fell on the news. WTI crude is trading back down around $61.30/barrel. Bonds are mixed. Corporates are flat to down, whereas lower-risk Treasury bonds are up on the day. The 10-year Treasury yield is back down to 2.46%.

President Trump, angry that the Chinese overplayed their hand, has threatened to impose more trade tariffs by Friday if negotiations don’t get back on track. He Tweeted a threat to raise tariffs on $200bil in Chinese imports from 10% to 25%. Additionally, he threatened to impose 25% tariffs on another $325bil in Chinese goods that haven’t yet been taxed. This of course puts the Chinese government in a very difficult position. A trade delegation will travel to Washington later this week on a damage control mission. US Trade Representative Robert Lighthizer will meet with them and express his dissatisfaction with their sudden withdrawal of commitment to a deal. “We felt we were on track to get somewhere. Over the course of last week we have seen an erosion of commitments by China. That in our view is unacceptable.” At the same time, the Chinese are preparing retaliatory trade tariffs just in case Mr. Trump means what he says.

First quarter earnings season continues apace. KLA-Tencor (KLAC) is tanking after reporting good results. The semiconductor maker report revenue and earnings-per-share that exceeded Wall Street forecasts. Unfortunately, management called out current demand weakness in memory semiconductors. That, along with the trade talks blowup, is hitting the entire semiconductor group today. KLAC is down 6.5%. According to Bloomberg, several Wall Street analysts raised their price targets on KLAC after the announcement. Many of them acknowledge near term risks from but say the long term fundamentals of the semiconductor cycle are positive.

Pioneer Natural Resources (PXD) is down 6.5% after reporting quarterly results that easily exceeded Wall Street’s consensus forecast. First quarter oil production also beat expectations. PXD just completed its sale of Eagle Ford properties in order to focus exclusively on the Permian Basin, but analysts are disappointed with what look to be fire-sale prices. In other words, the company was forced to write-down the value of those assets to get them sold. Management says it is re-focusing on cutting costs and returning more capital to shareholders. And get this—the CEO said US shale-oil drillers are pumping too much crude oil and the industry needs to rein it in to avoid another oil price crash.


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