Trading the tariff game

When a stock jumps around 8% in a day and breaks out of trading range to a roughly 60-day high—on a day when the broad market is trading in the red—a lot of traders would probably wonder what the hubbub was all about.

What’s the good news, they may wonder, and is there more to come (and can I get in on it)?

In the case of US Steel (X) yesterday, the “good” news appeared to be the White House’s announcement that it would, effective at midnight, slap tariffs on steel (25%) and aluminum (10%) imported from three of the US’s largest trading partners—the European Union (EU), Canada, and Mexico.1 The trio had previously been exempted from the global steel and aluminum tariffs announced by the White House in March.

The following daily chart shows how X shares pushed above their April and May swing highs to their loftiest level since May 21:

US Steel (X), 6/26/18 – 5/31/18. US Steel (X) daily price chart.

Source: OptionsHouse

On the other side of our northern border, by the way, shares in Canadian steel manufacturer Russel Metals (TSE: RUS) were down more than 1%, despite the company being cited as relatively “safe” from US tariffs, and its CFO arguing that US tariffs would be “nothing but positive because higher steel prices are good for us.”2 (Russel Metals apparently doesn’t do much business with the US, so its outlook may represent a somewhat narrow perspective on the issue.)

Domestic steel up, foreign steel down, right?

Perhaps. But the price action that unfolded throughout the day in X cast some doubt on the hypothesis that yesterday’s announcement would usher in a new era of uptrending US steel and aluminum stocks. By the time the first sentence of this article was complete, X’s 8% gain had dwindled to around 4%. By the time this sentence was being pecked out, it had shrunk to around 2.5%, and the stock was trading below its opening price. Buy the rumor, sell the news?

US Steel has been down this road before. Its stock rallied sharply in February amid rumors of imminent tariffs, but collapsed in March after the rumors became news—and after the White House exempted the EU, Canada, and Mexico from the duties. The stock has moved sideways since:

US Steel (X), 9/15/17 – 5/31/18. US Steel (X) daily price chart

Source: OptionsHouse

There are reasons to wonder whether X’s initial rally on the news represents the stock’s most likely near-term path:

● The stock’s intraday sell-off: X’s dramatic retreat from its high and its close toward the bottom of its range suggests traders may have reversed their outlook on the implications of the tariffs.

● Given the back-and-forth that has accompanied other tariff squabbles and political negotiations over the past few months—on-again, off-again talks with North Korea, repeals and exemptions of previously announced tariffs, etc.—there is speculation that yesterday’s developments are part of a negotiating tactic to get the EU, Canada, and Mexico to sign on to broader trade deals that the White House feels are more favorable to the United States.3 In other words, there are doubts the US will really want to economically punish political allies if it doesn’t have to.

So, from one perspective, US Steel just tested—and retreated from—the top of its recent trading range. Barring a quick move above yesterday’s high that could suggest the bulls are in charge, some traders may argue the trading range is still in effect, in which case another swing toward the bottom of the range is possible.

Market Movers Update. Fiat-Chrysler (FCAU) followed up on Wednesday’s 6% moonshot with another solid gain yesterday, pushing above $23. Today, outgoing CEO Sergio Marchionne is delivering a widely anticipated presentation about the company’s vision for the future.


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1 Trump hits Canada, Mexico, EU with steel and aluminum tariffs. 5/31/18.

2 One Canadian Steel Company Is Giving Trump Tariffs Thumbs Up. 3/2/18.

3 The New York Times. U.S. Allies Brace for Trade War as Tariff Negotiations Stall. 4/29/18.