Trade deals and spinning wheels
02/13/19

●US-China trade talks resume this week

●Some commodity futures were hit hard by tariffs last year

●Chip-related stocks with exposure to China may respond to resolution


 

The NeverEnding Story that Everyone Wishes Would End resumes this week, as the US and China again sit down and attempt to put the brakes on the tariff train.

For the better part of a year there’s been no shortage of stories about which markets and stocks would suffer the most because of a prolonged trade war, as well as which ones may pop the most in the event of a resolution.

Up to now, it’s been mostly an academic discussion, since no deal has been struck. News of progress has alternated with news of deadlock, subjecting the markets to short-term whipsaws with little extended follow-through. Case in point: The negative headlines that helped sink the market last Thursday, but were followed by the next day by a rebound.

And here we go again.

Micron Technology (MU) and Xilinx (XLNX), 12/21/18–2/12/19. Micron Technology (MU), Xilinx (XLNX) price chart. Chips cash in.

Source: Power E*TRADE


One sector that has been often singled out as a potential winner if the US and China can come to an agreement is tech—specifically, tech with lots of exposure to the Chinese market,1 with certain semiconductor stocks high on that list. Two stocks in this camp, Micron Technology (MU) and Xilinx (XLNX), were up big yesterday (XLNX hit a new all-time high), and have been on a tear since late December (chart above).

But don’t overlook the futures angle. China has traditionally imported significant amounts of US grains, especially soybeans, although wheat, rice, and corn have also been well represented. But those imports slumped as the People’s Republic slapped retaliatory tariffs on US agriculture products, despite recent pledges to resume some soybean purchases.

Corn, for example, has been trading in a progressively tighter range for months, not too far above the 2018 lows it made after last summer’s sell-off. March corn futures (CHJ9) rebounded yesterday to around $3.76/bushel after testing the bottom of the narrowest portion of the range:

March corn futures (ZCH9), 5/17/18–2/12/19. March corn futures (ZCH9) price chart. Corn playing the range.

Source: Power E*TRADE


While many traders are likely watching this market for a potential trading range breakout, others may be thinking more in terms of a continued (if possibly expanded) trading range. First, since this contract represents corn that’s deliverable in March, we’re talking about stuff that’s already sitting in silos and warehouses, not a crop that hasn’t been planted yet. So, for example, spring weather is less relevant than it would be for, say, the December 2019 corn contract, which will be grain mostly planted this April and May and harvested in the fall. So, floods, freezes, and plagues probably aren’t coming into play here.

From today until the contract’s expiration in mid-March, trade-deal news could be the biggest potential catalyst, since the most recent USDA reports from Friday and Monday (which tend to spark commodity futures action) didn’t do much to move the market.2

Although there’s no guarantee there will be any real news emerging from this week’s trade meetings, if the long-time pattern of seesawing positive and negative stories persists, traders may now be thinking that the next headlines will be on the bullish side, which could boost stocks, along with commodities like corn.

That may not mean a new long-term uptrend for grains, but it could play into the outlook for a corn to continue to move toward its range highs.

Market Mover Update: After initially trading higher yesterday morning, MacroGenics (MGNX) turned negative, posting its fourth down day since jumping 130% on February 6 (see “Now that’s a rally”).

Leading up to today’s earnings announcement, Waste Connections (WCN) rallied more than 1% to a new record high yesterday.

Today’s numbers (all times ET): Consumer Price Index (CPI), 8:30 a.m., Atlanta Fed Business Inflation Expectations (10 a.m.), EIA Petroleum Status Report (10:30 a.m.).

Today’s earnings include: Arris (ARRS), Canopy Growth (CGC), Cronos Group (CRON), Gaming and Leisure Properties (GLPI), Global Payments (GPN), Interpublic (IPG), Natus Medical (BABY), Teva Pharma (TEVA), Weibo (WB), American Intl (AIG), Cisco Systems (CSCO), HCP (HCP), Marathon Oil (MRO), MGM Resorts (MGM), NetApp (NTAP), Tilray (TLRY), Waste Connections (WCN).

 

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1 CNBC.com. These stocks could surge the most if and when US and China reach a trade deal. 1/16/19.

2 American Agriculturist. Morning Market Review for Feb. 11, 2019. 2/11/19.