Almost every sign pointed to the trade war between the U.S. and China expanding rather than shrinking on Wednesday and stocks were bearing the brunt of it. In morning trading, the
Dow Jones Industrial Average
was down 170 points, or 0.7%, and the
was down 15 points, or 0.6%. The market’s slump persuaded many investors to flock to Treasurys. The 10-year yield fell to 2.23% Wednesday morning, continuing its recent slide.
The bad news was coming from multiple fronts.
A state-controlled Chinese newspaper raised the prospect that China could limit exports of rare-earth materials that the U.S. uses for technology and defense products. About 80% of U.S. rare earths come from China. And there were signs that the trade war could extend beyond tariffs and limits on technology exports. Banks could also be drawn in.
(BABA) is reportedly considering a secondary stock offering in Hong Kong. If so, it would indicate that Chinese companies are more open to raising money in Asia. And there is a chance that U.S. markets could become less open to Chinese investment, if hawkish advisors have their way. Steve Bannon, President Donald Trump’s former chief strategist, is arguing for limits on Chinese companies that want to raise money from U.S. investors. On the plus side, the U.S. Treasury Department didn’t label China a currency manipulator, even after Trump campaigned on that expectation.
The tensions have hurt the market since the start of the month, and strategists doubt that the pain is over. The S&P 500 is still up 13% this year.
“The valuation and crowding concerns that caused us to worry about the possibility of a pullback back in April remain in place,” wrote Lori Calvasina, chief U.S. equity strategist at RBC Capital Markets. She noted that “the 4.9% pullback in the S&P 500 has been mild compared to most of the periods of consolidation that occurred within the 2010, 2011, and 2016 rallies.”
Companies with high revenue exposure to China have performed relatively well, considering the tensions. The 6 companies identified by Goldman Sachs that make at least half their revenue from China—
(MU)—are all up for the year.
Calvasina thinks consumer staples and utilities are best-positioned to weather the trade war. Among the staples stocks that RBC thinks are least exposed to the trade war are
Write to Avi Salzman at firstname.lastname@example.org