Playtime
The U.S. economy was just about to start throwing toys out of the pram. Will the latest trade deal with China be enough to lighten the mood again?
Regardless of Trump’s oddly specific comments on how many dolls young girls really need, Barbie manufacturer Mattel ($MAT) was one of the companies making it clear it would need to raise prices in response to the proposed tariffs on Chinese imports. After all, nearly 80% of all toys sold in the U.S. are made in China.
Fortunately, a U.S.-China trade deal over the weekend changed that outlook, and sent stock futures soaring before the trading week began. Both countries agreed to temporarily ease tariffs for 90 days: U.S. tariffs on Chinese goods were reduced to 30%, while China lowered tariffs on U.S. imports to 10%.
It provides relief because this particular trade dispute – between the toughest kids on the block – had the global supply chain starting to resemble a disorganised toy chest. Container costs surged, shipments stalled and CEOs were left playing a frantic game of distribution Jenga, hoping the whole thing wouldn’t topple on their quarterly earnings.
Signs of a messy economic picture were also starting to emerge. ‘Fragile’, a term that often describes cargo, was suddenly being used to describe the U.S. economy. The 0.3% contraction in GDP last quarter isn’t quite the symbol of ‘the golden age’ for America that Trump promised.
Trump has called for Fed Chair Jerome Powell to lower rates, but he refuses to participate in the puppet show. Powell held rates steady last week, while noting that the ‘risks of higher unemployment and inflation have risen.’
But the easing of U.S.-China trade tensions is a huge win for pretty much all market participants. The biggest winners this week? Semiconductor stocks – arguably the toy soldiers of this trade war. Nvidia ($NVDA), AMD ($AMD), Broadcom ($AVGO) and Qualcomm ($QCOM) all soared on Monday.
Other stocks that came out to play were U.S.-listed Chinese tech giants JD.com ($JD) and Alibaba ($BABA). U.S. retailers like Amazon ($AMZN) also rallied hard – not surprising, given that 70% of sellers on the platform source products from China.
We had seen some resilience to the policy uncertainty from firms that still delivered solid earnings beats – 78% of S&P 500 firms managing positive EPS surprises in Q1. But as more of them issued negative guidance for Q2, this week’s trade deal could really turn things around.
If the market has been like a yo-yo since Liberation Day, many investors may now feel ready to try some tricks.
