Stock market corrections continue as technology trade war heats up
As expected, stock market corrections have continued with technology stocks leading the sell-off and Japanese names heavily exposed to China are taking the biggest hit. With most suppliers in the US, Europe, Japan and South Korea having followed through the US blacklisting of Huawei by halting sales components to the Chinese firm, the technology iron curtain is being quickly erected that has created huge uncertainties facing the technology supply chain and putting much pressure on their valuation premiums.
China’s reaction has been muted thus far and has yet to retaliate in hitting equivalent US firms who are dependant on China for their supply chain with Apple looking the most obvious target that investors fear the most to be caught in this technology proxy war. Not wanting to make matters worse, China is treading carefully, announcing that they are still committed to striking a trade deal but not with a gun to its head. In the meantime, Chinese state media have vowed not to fold under US bullying.
Trump’s latest manoeuvre following announcing a 180 day moratorium for the Huawei sales ban is to indicate that Huawei will be part of any trade deal they make with China, making it more than obvious that the ban is simply being used as negotiation leverage. This is similar to the ZTE ban last year which was lifted fairly quickly after getting some concessions from China.
However, it now looks difficult to see how the US can lift the ban facing Huawei given its assertion that the Chinese tech giant poses a huge national security threat. Any deal would undermine that entire thesis. Indeed, many US lawmakers on either side of the political spectrum have expressed deep concerns about any prospects of reversing the ruling to blacklist Huawei. So there is good chance that Trump has lost control of the narrative here and lifting of the ban will prove very difficult.
In any event, as we noted last week, we think much of the damage has been done. With China much more likely to strive to become more independent from the global tech supply chain, it is less likely to abide to intellectual property laws and now highly unlikely to slow down any state subsidies in technology fields. Moreover, the global supply chain itself is being redrawn with companies no longer waiting for a trade deal and looking to rebase their factories and mitigate geopolitical risks in the future.
None of this paints a positive picture for stock markets in the shorter term. At least not until we see some de-escalation which would help calm markets and squeeze some of the short positions. After all, this is a lose-lose scenario that logic dictates both parties will avoid. But these are much more politically charges times where logic might not influence the playbook as much as populist policies, especially ahead of the Trump’s second term push which seems to be dominating all policies including the military escalation, raising the tension with Iran. Moreover, the late June G20 summit in Osaka where US and China are hoped to resume their talks is still over a month away, a lifetime for market participants.
In the meantime, any hopes for a second half recovery in the tech and automation space now looks highly doubtful. Indeed, foundries are already pointing to weaker visibility setting in, clouding their growth prospects. Not only we don’t expect a 2nd half earnings recovery now but we suspect corporate earnings picture to notably deteriorate, especially from Q3, whatever happens now to trade talks. Given the scale of this geopolitical disruption we think that recovery prospects could be delayed by as much as a year perhaps more if developments deteriorate further.
With Trump visiting Japan this week, focus will shift to how the US is planning to treat its allies when it comes to trade negotiations given that it now has its hands full with China. Japan’s PM will do his utmost to take advantage of this while striking an over-friendly tone. Tokyo will be looking for concessions from the US delegate, particularly on auto exports and on any US demand for currency provisions that might force a change to BOJ’s ultra-loose monetary policy.
Early signs indicate that US is unlikely to be too pushy. The early statement made by US National Security Adviser, John Bolton that the latest North Korean missile launches do indeed breach the UN restrictions, was certainly done to appease Abe-san who clearly wants to get more involved in future North Korean talks to strengthen his own standing at home, not to mention, his cause in changing Japan’s passive constitution, his desired signature policy change.
With Japan’s consumption tax hike in October looking increasingly unlikely to be derailed and coming at exactly the worst time possible, the Japanese leader will clearly no longer have a strong economy as a tailwind support. Much rides on the coming Upper House elections in the summer but with opposition parties in Japan looking weak and fragmented, Abe too looks more likely to be allowed to pursue his nationalist agenda.