Trade deals and hot wheels
08/30/18

●US auto stocks rallied amid Monday’s new US-Mexico trade deal.

●General Motors’ (GM) bounce followed recent test of support level.


 

As far a “trade war” news goes, Monday’s was a refreshing change of pace—for traders, anyway.

The various tariffs (real or threatened) and trade spats of the past several months have occasionally rocked the stock market as a whole, and US auto makers are arguably one of the more trade-sensitive industries. Tariffs on the raw products (e.g., steel and aluminum) needed to make cars is one concern, while access to workers, cars, and customers outside US borders is another. In July, no less than General Motors (GM) CEO Mary Barra warned that higher import tariffs threatened US jobs and could lead to “a smaller GM.”1

But Monday’s broad-market rally (S&P 500 +0.77%) came amid news the White House had reached a deal with Mexico, part of an overhaul to the North American Free Trade Agreement (NAFTA) that would, among other things, require that cars qualifying for free-trade status contain a larger percentage of parts built in the US or Mexico.2

General Motors (GM), 4/20/18–8/29/18. General Motors (GM) daily price chart. Rallied after trade deal.

Source: OptionsHouse

US auto stocks, which have struggled for much of 2018, appeared to like the news, with Ford (F) gaining 3.2% on the day and GM jumping 4.8% (chart above). GM pulled back the next two days, but more than halfway through yesterday’s session it had rebounded to trade in the upper half of its range.

As is always the case with such trade deals, there’s debate regarding both its general merit as well as its specifics. But some analysts have pointed out that the deal (at least for now) removes the risk of the White House following through on its threat to impose 25% tariffs on imported vehicles, and it also would allow free-trade status for the vast majority of vehicles produced in the US, Mexico, and Canada.3 In other words, some of the trade-related uncertainties that have been weighing on auto makers in recent months may have been lifted.

General Motors (GM), 4/3/2017–8/29/18. General Motors (GM) price chart. Bounced off support.

Source: OptionsHouse

There’s also a price-action component for GM: The longer-term chart above shows that Monday’s rally came a little less than two weeks after the stock pulled back almost precisely to its May 3 low of $35.28, which is in the support zone (a little above and below $35) that the stock has now bounced off three times since initially consolidating around this level in August 2017.

With this level still relatively close, traders will soon find out what the market really thinks about the trade deal’s implications for the auto industry, and whether GM will be able to shift into a higher gear.

Note: GM’s next earnings release is currently scheduled for October 23.

Market Mover Update. In notching its fourth-straight record high yesterday, the S&P 500 (SPX) closed above 2,900 for the first time.

LiveAction scans yesterday showed unusually high (+800%) put options volume in Exact Sciences (EXAS), as well as a high (15:1) put/call ratio.

After a pullback on Tuesday, many medical marijuana stocks—including the Canada-based trio of Canopy Growth (CGC), Cronos Group (CRON), and Tilray (TLRY)—turned sharply higher again yesterday, attempting to build on the huge rallies they’ve experienced since liquor company Constellation Brands (STZ) upped its stake in CGC in mid-August.3

 

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1 NBCnews.com. Trump's tariffs will lead to job losses, warns General Motors CEO. 7/2/18.

2 The Wall Street Journal. Mexico Pact Eases Car Makers’ Concerns. 8/27/18.

3 Bloomberg.com. GM, Ford Jump as Trump's Mexico Deal Averts Tariff Doomsday. 8/27/18.

4 CNBC.com. Corona beer maker Constellation ups bet on cannabis with $4 billion investment in Canopy Growth. 8/15/18.