Deals – SG’s Adventus sells 45% stake in unit to reduce exposure to Vietnam project

Singapore’s Adventus Holdings Limited has sold 45 per cent of its stake in subsidiary ADV S3 for $1.1 million to one of the latter’s joint venture partners for a residential project in Vietnam, it said in an SGX filing on Tuesday.

Adventus said that it has encountered some difficulties in obtaining licences, permits and/or approvals for the Vietnam project.

“The proposed disposal would enable the group to reduce its exposure in the Project and thereafter focus its resources and time in other projects,” Adventus said.

The buyer is Tran Hoang Anh Tuan, one of the partners in AP NHS Da Nang Joint Stock Company (AP NHS), a joint venture between ADV S3, Panthera and Nguyen Thai Dong Huong.

The JV was established to develop a residential project in Da Nang.

ADV S3 had in 2018 agreed to pay VND 50.72 billion dong (S$2.9 million) for a 45 per cent stake in AP NHS.

Adventus Holdings intends to use proceeds from the proposed disposal for its working capital requirements and to fund acquisition opportunities, it said in the disclosure.

Adventus Holdings Limited is an investment holding company, which engages in property investment and development, hospitality, project management activities as well as commodities and mineral resources businesses within Asia.

By Quynh Nguyen

Full link: https://www.dealstreetasia.com/stories/adventus-vietnam-project-136841/?mc_cid=fed678b28e&mc_eid=885b2254d8

Deals – Vietnamese vacation rental startup Luxstay bags $4.5m from Korean investors

South Korean retail firm GS Shop and early-stage venture capital firm Bon Angels have participated in a $4.5- million bridge funding for Vietnamese accommodations startup Luxstay, according to a press statement.

Prior to this investment, Luxstay had raised a total of around $6 million from CyberAgent Ventures, Genesia Ventures, Nextrans and two Vietnamese VC firms, ESP Capital and Founders Capital.

Luxstay said it expected to close its Series A fundraising in 2019. DEALSTREETASIA understands the next financing round could be worth at least $10 million.

Founded in 2017, Luxstay is a home-sharing platform focusing on the luxury customer segment. The local short-term rental value was more than $100 million in 2018, compared to the local $7 billion accommodations market.

“In developed countries, home-sharing accounts for 10-20 per cent of the home-rental market. This shows a huge opportunity for this industry in Vietnam, which is expected to reach $2-4 billion in 2025,” Luxstay said.

The company works with local partners in other countries such as Japan and South Korea, which have a large number of tourists to Vietnam and vice versa. GS Shop and Bong Angels will be important connections for the company to other strategic partners and investors in Korea in pursuit of international expansion, it added.

The Airbnb rival in Vietnam said it targeted revenues of over $300 million in 2023, and a home rental market share of 30 per cent.

South Korean tourists to Vietnam reached 3.5 million in 2018, up 44 per cent from 2017 compared to the 20 per cent growth of all international tourists, according to Vietnam National Administration of Tourism. Meanwhile, the total spending for tourism in 2018 amounted to $25 billion, of which the accommodation sector accounted for 28 per cent, or about $7 billion, and is expected to increase to $13 billion by 2025.

Tapping this growing trend, travel tech was one of the most funded tech verticals in Vietnam in 2018 that saw an aggregate of $889 million.

When it comes to the economic partnership between Korea and Vietnam, there has been substantial development over the years. On the venture capital front, a lot of Korean investors have been pursuing early stage opportunities.

GS Shop, a limited partner of 500 Startups Vietnam, recently made its debut direct investment in e-commerce startup LeFlair. Meanwhile, Bon Angels, the early backer of local unicorn Woowa Brothers, has also invested in several Vietnamese startups. Last October, it launched its third early-stage fund at 50 billion won ($42 million) and aimed to expand investment in Southeast Asia.

By Nguyen Thi Bich Ngoc

Full link: https://www.dealstreetasia.com/stories/luxstay-fundraising-136932/?mc_cid=fed678b28e&mc_eid=885b2254d8

Deals – Casino operator Suncity to open resort in VN, plans growth outside Macau

Macau’s biggest junket operator will open its own resort in Vietnam by year’s end, seeking growth elsewhere in Asia as an exodus of big-spending VIPs from the world’s gaming epicenter shows no sign of abating.

Suncity Group, a middleman lender for Chinese high rollers, is moving into casino operations with a $4 billion Vietnam project and is eyeing the Philippines, Cambodia and Japan for its next investment. Suncity says more than 30% of the group’s revenue now comes from markets outside Macau, compared with 10% five years ago.

The overseas push comes as Suncity expects that its betting volume will drop by 10% to 15% in Macau in the second half of the year, as tensions from the U.S.-China trade war and stricter industry regulations damp VIP sentiment.

“Our betting volume in Macau fell 20% in the last few months, but the group’s total volume fell by only single digits,” said Andrew Lo, executive director of the group’s listed vehicle, Suncity Group Holdings Ltd., in an interview Tuesday. “Where is the business going? To the overseas markets.”

Major Shift

Suncity’s urgency to diversify beyond Macau is the latest indication that a major shift is taking place in the gaming hub and challenging its prospects for growth. A sluggish Chinese economy and stricter regulations, including a smoking ban in casinos, have been keeping high-end customers away from the baccarat tables. The emergence of regional gaming spots across Asia are offering an attractive alternative to Chinese high rollers, who increasingly feel more comfortable further away from Beijing.

Overall casino revenue at the world’s largest gaming hub slumped 8.3% in April, the most in almost three years, with the VIP segment sinking 23% from a year earlier.

“The threat is real,” wrote Union Gaming analysts Grant Govertsen and John DeCree in a note Monday. “Clearly there is a growing realization that Macau VIP play is bleeding to regional markets, with Cambodia and Vietnam being the primary beneficiaries.”

While it’s typical for high rollers to try out regional resorts and eventually return to Macau, the analysts said “this time is different.” The regional properties have improved in quality, and infrastructural expansion has made them easier to reach, they wrote, noting that junket operators are sending a steady stream of Macau players to these locations.

While Suncity’s Lo said that Macau’s scale and variety of gaming options cannot be replaced by any other location, he was pessimistic on the territory’s near-term outlook. The company controls about half of the city’s market for junkets, which are operations that lend money, collect debts and market casino trips to high-end gamblers.

Stock Performance

“Macau stocks have risen by a lot in the first half of the year because the market is expecting a rebound in gaming revenue in the second half,” he said. “But so far, I still haven’t seen any positive signs.”

A Bloomberg Intelligence gauge of Macau casino stocks has dropped 18% this month, after climbing almost 30% this year through April.

The company’s integrated resort is located in Hoi An, near the emerging tourist destination of Danang in central Vietnam. The company plans a soft opening at the end of this year with 140 gaming tables and 300 slot machines. About 70% of the initial revenue is expected to come from VIP gamblers, but Suncity is confident Vietnam’s economy is strong enough to bring in more mass gamblers.

So far, Suncity and its partners have invested more than $1 billion in the Vietnam project, which is expected to take 13 years to complete. Lo said future expansion will follow China’s “Belt and Road” route, as the key for VIP business is to follow where Chinese money and human capital go.

Bloomberg

By Daniela Wei, Jinshan Hong

Full link: https://www.dealstreetasia.com/stories/suncity-group-casino-vietnam-project-136847/?mc_cid=fed678b28e&mc_eid=885b2254d8

Collection – Trade war: will China use ‘nuclear option’ of banning rare earth exports to US?

  • China accounted for seven out of every 10 tonnes of rare earth elements mined worldwide last year and was the biggest exporter to America
  • As trade tensions have escalated, analysts are questioning whether Beijing will use its dominance of the industry as a check on US tariffs

The chassis and batteries of an electric car are displayed at Auto Shanghai 2019. Regardless of the trade war, Beijing will ultimately move to reduce exports of rare earths to meet its own domestic demand, specifically from its electric-vehicle industry. Photo: AFP

As China looks for ways to retaliate against the United States in a rapidly escalating trade war, one potential target that is looming large, particularly for the technology sector, is rare earth metals.

The minerals are vital to the production of components that power electric vehicles, anchor the audio and camera systems of Apple iPhones and help the US military’s guided missiles reach their targets.

The elements – little known beyond chemists, geologists and speciality manufacturers until their political importance became more apparent in recent years – are also predominantly mined and refined in China.

As trade tensions have escalated, analysts are questioning whether Beijing will use the “nuclear option”, its dominance in the industry, as a check on efforts by US President Donald Trump to place tariffs on nearly all goods exported from China, as he seeks to change years of Chinese industrial and trade policy.

Speculation has been rampant this week after Chinese President Xi Jinping and his top trade negotiator were photographed at a rare earth mining and processing plant in China’s eastern Jiangxi province, a key region for mining rare earths used in electric vehicles.

Stocks of Chinese rare earth companies have soared since the visit, as investors anticipate a tightening in the supply of some rare earths and potentially higher prices.

The prices of so-called heavy rare earths, which are used in batteries for electric vehicles and in defence applications, have risen 30 per cent this year, said Helen Lau, senior analyst and head of metals and mining research at Argonaut in Hong Kong.

“I think it is a little bit reckless, from my point of view, for China to ban the export of rare earths to the US directly,” Lau said. “There’s always some way to have a similar impact … Maybe we want to reduce exports to everyone. That is a likely scenario.”

What leverage does China’s rare earths dominance hold in trade war?

Lau said she believes China, regardless of the trade war, will ultimately move to reduce exports of rare earths to meet its own domestic demand.

“Everyone knows that China needs rare earths for its electric-vehicle industry,” Lau said. “Electric-vehicle production is very strong – every single month it is growing in high double digits, and this year it has doubled from last year. The demand for rare earths is very strong.”

A key time to watch will be June, when China is expected to set its mining quota for rare earths for the second half of the year. The first half quota was 60,000 tonnes, the same as last year, she said.

Rare earths are one of the few categories of products that have avoided US tariffs despite threats last year by the Trump administration.

China has put its own retaliatory tariffs on US-produced rare earth elements and several categories of these minerals are set to face additional tariffs of up to 25 per cent come June 1.

The 17 elements, with sometimes hard to pronounce names such as lanthanum, neodymium and ytterbium, share similar chemical and physical properties. They are more plentiful than precious metals such as gold and platinum, but can be difficult and expensive to refine and extract.

They are used to provide precision polishes to flat-panel displays, remove impurities in steelmaking and to make phosophers used in incandescent and LED lights. Some are even used as pigments in ceramics.

Chinese President Xi Jinping visits a rare earth minerals production facility in China's eastern Jiangxi province on Monday, May 20. Photo: Xinhua

Chinese President Xi Jinping visits a rare earth minerals production facility in China’s eastern Jiangxi province on Monday, May 20. Photo: Xinhua

The US used to dominate the industry, serving as the world’s leading miner until the 1980s, when it was overtaken by China, according to data from the US Geological Survey. Lower labour costs and more lenient environmental standards are some of the reasons why mining migrated from the US.

Last year, China accounted for seven out of every 10 tonnes of rare earth elements mined worldwide and was the biggest exporter to the US, according to data from the Geological Survey and the US International Trade Commission.

In addition, China has moved to create an ecosystem that not only extracts the raw materials, but produces components that rely on rare earths, such as magnets vital to missile guidance systems and synthetic gems used in high-power lasers.

China’s unwavering dominance in the market has raised concerns among companies and policymakers, particularly as China has used it as a weapon in the past.

During a diplomatic stand-off in 2010, China briefly limited exports of rare earth materials to Japan in a row after a Chinese trawler collided with Japanese patrol boats near a disputed island. China did so without publicly acknowledging the restriction.

That same year, Beijing placed quotas, licences and taxes on rare earth elements as the worldwide use of rare earths in clean energy and defence technologies was on the rise. China removed these restrictions in 2014 after the US, Japan and members of the European Union complained to the World Trade Organisation.

Frankie Chan, senior research analyst at Emperor Securities in Hong Kong, said that Xi’s visit to Jiangxi was likely an attempt to send a “strong message” to the US.

“We have seen China use these as an effective means to retaliate,” Chan said. “Maybe after June, there will be some follow-up action. Now it’s just a message – I have the upper hand on the rare earth front. If we still keep on without any improvement, I will retaliate.”

Presidents Trump and Xi are expected to meet on the sidelines of the G20 summit in Osaka in late June. Chan said he expects Beijing will begin with a small quota or restriction, and increase it on a step-by-step basis if things do not improve.

The US Government Accountability Office, an independent, non-partisan agency, warned three years ago that China’s dominance “may pose risks to the continued availability” of rare earth materials for defence applications in the future.

The Mountain Pass Mine in San Bernardino County, California was acquired by an American consortium backed by China’s Shenghe Resources Holding. Photo: MCT

The Mountain Pass Mine in San Bernardino County, California was acquired by an American consortium backed by China’s Shenghe Resources Holding. Photo: MCT

The Mountain Pass Mine in San Bernardino County, California, is the only producer of rare earth elements in the US and its raw materials are refined in China. The mine was acquired out of bankruptcy in 2017 by an American consortium backed by China’s Shenghe Resources Holding.

On Monday, Lynas Corporation, an Australian mining company, and American chemicals company Blue Line Corporation announced they had signed a memorandum of understanding to develop a plant to produce separated medium and heavy rare earth products in Hondo, Texas, “to close a critical supply chain gap for United States manufacturers”.

Chinese rare earths firm’s California mine caught in trade war crossfire

Concerns about availability and rising prices have spurred technology manufacturers to find ways to recycle and reuse rare earth materials from their devices, and has led to increased exploration by governments worldwide.

Japanese scientists recently announced they had discovered a concentrated deposit of rare earths on the sea floor about 2,000 kilometres southeast of Tokyo.

Even as tensions are rising between the world’s two largest economies, Ryan Castilloux, managing director at Adamas Intelligence in Amsterdam, said he doubts China would put a ban on rare earth exports to the US.

“It would be a last leverage in a very extreme situation,” Castilloux said. “Once China uses its rare earth dominance as a political tool, it would push end users to look for alternatives.”

By Chad Bray  

Full link: https://www.scmp.com/business/companies/article/3011302/trade-war-will-china-use-nuclear-option-banning-rare-earth?utm_medium=email&utm_source=mailchimp&utm_campaign=enlz-scmp_international&utm_content=20190522&MCUID=6af992dbf1&MCCampaignID=8cd931c36e&MCAccountID=3775521f5f542047246d9c827&tc=3

Collection – Using the WTO to address the China challenge

The US–China economic relationship is at a critical juncture. Over the past year, the United States imposed tariffs ranging from 10–25 per cent on US$250 billion worth of Chinese imports. China retaliated by raising tariffs on US exports. Recently, the US government’s 10 per cent tariff on US$200 billion of Chinese imports was increased to 25 per cent and the Trump administration has threatened tariffs on the remaining US$300 billion of Chinese imports. China has threated to further retaliate.

Aides set up platforms before a group photo with members of US and Chinese trade negotiation delegations at the Diaoyutai State Guesthouse in Beijing, China, 15 February 2019 (Photo: Mark Schiefelbein).

Until recently, the United States supported China’s global integration based on a set of core expectations. Among these is the assumption that as China benefitted from the international economic system, including WTO membership, it would be a responsible stakeholder. China was expected to work with the United States ‘to sustain the international system that has enabled its success’. But this view of China evolved into seeing the country less as a partner and more as a competitor, culminating in the current bilateral economic tensions.

The US concerns that underpin these tensions stem from specific practices endemic to China’s economic model that systematically tilt the playing field in favour of Chinese companies. China’s economic system relies on state-determined economic goals, and the allocation of resources and finance to state-owned enterprises (SOEs) to achieve these goals.

In addition, China’s industrial policy is increasingly aimed at self-sufficiency in emerging technologies, which stands at odds with a trading system based on comparative advantage. China’s use of industrial policy to pick winners is expected to continue leading to excess production and dumping overseas, including in the area of advanced manufactured goods as the economy gears up to produce robots, new energy vehicles and batteries.

US unease over China’s economic model also arises at a time of increasing concern over China as a threat to US national security, particularly with respect to technology access.

Amid all of this, clarity about the economic costs and benefits to the United States from trade and investment with China is important. The economic relationship delivers more benefits to the United States than is commonly understood.

It is estimated that US exports to China support around 1.8 million jobs in sectors such as services, agriculture and capital goods. When the activities of affiliates of US and Chinese companies in each respective market are factored in, the United States is shown to sell more to China than vice versa.

But China–US trade has also led to job destruction in some US industries — particularly low-wage manufacturing. And China’s economic practices regarding intellectual property (IP) and technology transfer risk harming the US services sector and knowledge economy.

China’s economic system also places several acute stresses on the WTO. China made significant commitments as part of its WTO accession in 2001 but developments in the Chinese economic system mean these commitments are increasingly difficult to enforce. China’s unique economic model presents new challenges that were not anticipated at the time of its WTO accession and are therefore not covered by WTO rules. Meanwhile, scepticism over the WTO’s capacity to deal with the magnitude of the China challenge — both in terms of the rules and the dispute settlement system — is on the rise.

Despite its drawbacks, the WTO remains central — though this is contingent on strong US leadership. The WTO offers the only global set of trade rules that both reflects core US values and forms a baseline on which to build global support for a push back against Chinese economic practices.

Where China is in breach of its WTO commitments, WTO cases should be brought against it. Where WTO rules are unable to discipline Chinese trade practice, bilateral or unilateral action may be necessary. For its part, China must comply with its WTO commitments and make certain reforms that will likely touch on areas of state control over the economy. The United States and China should seek a WTO waiver for any bilateral deal that might be inconsistent with WTO rules in order to minimise harm to the institution.

The US administration also needs a forward-looking trade policy to establish free trade agreements (FTAs) with allies that raise the standards for trade. In this context, re-joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) should be a priority. The administration should also control access to US technologies through foreign investment and export controls, effectively using WTO-consistent tariff policies to minimise the harm from Chinese economic practices on US businesses.

In taking this multifaceted approach, the United States needs to uphold its core values such as non-discrimination, transparency and rule of law. Working toward a managed trade framework more akin to the Chinese model would undermine the WTO and be inconsistent with these values. China purchasing more US goods would also likely violate China’s most favoured nation (MFN) WTO commitment and disadvantage US allies.

Instead, the US administration should aim for long-term, market-orientated solutions while also strengthening the global trading system and rule of law.

Author: Joshua P Meltzer

Full link: https://www.eastasiaforum.org/2019/05/22/using-the-wto-to-address-the-china-challenge/

Note – Investopedia: The Wall of “No” & Brexit and Blacklists Baffle Market Bulls

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U.S. Markets Fall on Fed Minutes and Spending Bill Doubts

U.S. markets were under pressure all day today, and the minutes from the most recent Federal Reserve meeting on May 1, added to the pessimism. That meeting, which was before trade talks between the U.S. and China took a turn for the worst, indicated that (at the time) the Federal Open Market Committee (FOMC) was comfortable with where interest rates were, and had no plans to change them this year. We knew that from Chairman Powell’s comments after the meeting, but to read the minutes and see that all members of the Committee felt that way, may have been disappointing to investors.

Here is the key passage:

“Members observed that a patient approach to determining future adjustments to the target range for the federal funds rate would likely remain appropriate for some time, especially in an environment of moderate economic growth and muted inflation pressures, even if global economic and financial conditions continued to improve.”

Translation: “Get comfortable…We shall not move.”

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file photo, courtesy shutterstock

Why it Matters

The Fed has been promising patience all year, so this should come as no surprise. Chairman Powell has done so, even as the Trump Administration has publicly shamed the Fed for raising rates in 2018 and not cutting them in 2019. As an independent government body, Powell and the Fed have done the right thing by not listening. It must be hard.

Still, investors may have been holding out hope that the Fed would be more accommodating to help boost growth, now that corporate earnings are slowing along with the global economy. Lower interest rates boost capital spending, and spending juices the economy and therefore the stock market.  (James has more on how this news impacted the 10-year U.S. Treasury yield in our daily chart, below)

What’s Next?

The Fed will meet five more times in 2019. If you look at the CME’s Rate Watch Tool like we do, you have to go all the way out to the December 11th, 2019 meeting to see when traders think the Fed will make a rate cut. About 64% of traders think rates will be cut by 0.25% – 0.50% at that meeting. A lot could happen between now and then, but the Fed minutes from the last meeting make this seem like it’s not going to happen.

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Infrastructure Spending in Doubt

One of President Trump’s campaign platforms was infrastructure spending. The U.S. badly needs it, and it’s an easy political win that both parties rallied around. It also helped boost infrastructure and construction stocks over the past two years.

That goodwill hit the ‘Wall of No’ today, as the President told reporters that he walked out of a meeting with Democratic leaders on infrastructure this afternoon, telling them, “I walked into the room and I told Sen. Schumer and Speaker Pelosi, ‘I want to do infrastructure’ … but we can’t do it under these circumstances.”

The circumstances the President was referring to are the multiple investigations Democrats, State and Federal agencies have launched into his purported activities as a candidate for president prior to his election in 2016.

That’s not our territory, but we do know which stocks and sectors that were impacted by this turn of events.

Shares of Nucor, Martin Marietta Materials and Granite Construction, three of the biggest infrastructure related companies in the U.S., all traded lower today, although Granite was able to rally off its lows.

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What’s Next

There is a chance that an infrastructure bill might actually make it to the President’s desk and he will sign it. Anything can happen. But, we are in an era of unpredictability, as we have learned with the China trade talks and other issues that impact the economy and stock market. The safe bet here is continued uncertainty.

Target Hits the Bullseye

We wrote about the ‘tale of two cities’, facing retail stocks, yesterday. Quick recap: Those with growing e-commerce capabilities and limited exposure to tariffs on both the import and export side, are faring better than those that don’t.

Target proved that it is winning on both fronts.

The retailer handily beat analyst expectations for revenue and profits, but more importantly, it grew both same store sales and online sales.

Same store sales grew 4.8% while online sales jumped 42%. Target has something that Amazon can’t quite offer yet – curbside pickup for merchandise ordered online. Amazon is starting to do that with Whole Foods, but it doesn’t have the store footprint that Target has. That has been a winning formula for Target and one you can count on seeing a lot more of. Here is a slide from Target’s earnings presentation which shows its digital strategy.

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charts courtesy www.koyfincharts.com

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Advance Auto Parts’ quarterly report beat estimates by 4%. Target had a day for reasons we talked about above.

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Lowe’s delivered an 8% miss on earnings today. Nordstrom reported quarterly earnings 46% lower than expected. Yes, you read that right.

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Word of the Day

Antitrust

Today, a judge ruled that Qualcomm abused its position and size in the semiconductor industry in order to strangle competition and overcharge customers (cellphone makers). A good day to review what antitrust laws say, and what they are:

“Antitrust laws are regulations that monitor the distribution of economic power in business, making sure that healthy competition is allowed to flourish and economies can grow. Antitrust laws apply to nearly all industries and sectors, touching every level of business, including manufacturing, transportation, distribution, and marketing.”

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Today in History

May 21, 1973: Big day in the development of the Internet, as computer scientist Robert Metcalfe, working at Xerox’s Palo Alto Research Center (PARC), drafts a memo describing what he calls The ETHER! Network, or Ethernet.

Michael Hiltzik, Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age (HarperBusiness, New York, 1999), p. 187

Chart of the Day: Yields Drop on Dovish Fed Minutes

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Wednesday’s release of minutes from the early May FOMC meeting clearly struck a dovish tone, pressuring government bond yields like the benchmark 10-year U.S. Treasury yield. The summary of the FOMC meeting indicated that the Federal Reserve will likely refrain from raising interest rates “for some time.” Even more dovish was the addition of “even if global economic and financial conditions continued to improve.” Generally, an improving economy helps place upward pressure on interest rates. But the Fed is now saying that it would resist that pressure, at least for the foreseeable future.

As shown on the chart, the 10-year Treasury yield has virtually been in a state of free fall since the major double-top pattern around 3.250% completed forming in November of last year. Now, the tables have turned and the 10-year yield has just formed a double bottom right around the 2.350% level. The first bottom was in late March, which hit a level not seen since the end of 2017. And just last week, the benchmark yield dropped down to test November’s trough. Since the second bottom, the yield was on the rebound until Wednesday, when the dovish Fed minutes were released.

Strong declines in bond yields have been driven in recent months by fears of slowing global economic growth, dovish-turning central banks, and expectations of low interest rates for longer. Most recently, an escalating trade war between the U.S. and China has reignited fears that protectionist policies on both sides could further weigh on global economic growth. Now that the Fed has indicated in no uncertain terms that it intends to keep rates on hold, the outlook for yields continues to be to the downside. For the 10-year yield, there is a distinct possibility that the double bottom could see an impending breakdown, which would be a substantially bearish signal for yields.

Major Moves

The list of Chinese technology companies that are restricted from doing business with US firms may grow by another 5 firms soon. The new additions to the list are surveillance and security technology companies like Hikvision and Dahua.

Most Western investors are likely unfamiliar with the companies that could be directly restricted, but there are secondary effects that could erase yesterday’s reversal in more well-known US technology and semiconductor groups. For example, if more Chinese firms are prevented from buying tech from Intel (INTC) or Qualcomm (QCOM) the sellers are likely to suffer as well.

You can see the effect of the trade-war and blacklisting on Micron Technology (MU) in the following chart. The stock completed a large “double-top” technical pattern by breaking below $36.63 on Friday and has continued its move to the downside. In my experience, using a fibonacci retracement of a reversal pattern does a good job of identifying a likely initial target which, in this case, is near $31.71 per share.

Trade wars and blacklisting are likely to drag on other firms in the tech sector as well. While not directly impacted like the chipmakers, companies like Apple (AAPL) are at risk of retaliation by the Chinese government. Unfortunately, this week’s trade-related troubles will be compounded by further losses in Qualcomm which lost its case over anti-trust behavior today as well.

While these issues aren’t necessarily big enough to cause a major economic disruption in the US, performance in the tech sector can have a big impact on short-term investor sentiment. Unless tensions can be reduced quickly, these issues are likely to keep the S&P 500 from reaching its prior highs.

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 S&P 500

Support for the S&P 500 large cap index and the Russell 2000 small cap index has continued to hold despite some of the back and forth in the market. Prices are still roughly in the same range as they were at this point last week and haven’t shown much additional momentum since the major indexes bounced on the 15th and 16th last week.

As I discussed earlier this week, I am concerned about the potential for a head and shoulders pattern that could be completed if prices lose further momentum. This could be a trigger for more volatility, but investors should give the market some room to shake out before getting too bearish even if the pattern does complete. Somewhat counter intuitively, bearish head and shoulders patterns don’t have a good track record for predicting large downside moves in bull markets.

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Risk Indicators – Brexit

It’s been a refreshing change that Brexit hasn’t been the headline issue driving market volatility lately. The last time I mentioned the risks of Brexit was in the April 24th issue of the Chart Advisor. However, I need to make some adjustments to my European-UK divorce estimates after news that Prime Minster, Theresa May, is coming back to Parliament with more unpopular proposals.

Hardliners within May’s government are worried that she will present Parliament with the opportunity to vote on much softer options for Brexit – including the possibility of a new referendum – the first week of June. Both pro-Brexit and anti-Brexit MP’s are unhappy with May and there are no assurances that any deal she presents will last if she leaves office in June (or earlier).

As a result of that uncertainty, the British pound (GBP) has been losing against the dollar since May 6th. The currency is nearly back to it’s lows from last December. The problem with this trend is that a weaker GBP relative to the dollar makes US exports to the UK more expensive and therefore less attractive. Depending on how you run the numbers (there is some dispute about this,) the UK is one of the few major Western economies with which the US runs a trade surplus.

For some industry groups, this is a bigger issue in the short-term. For example, automobiles and electrical power generation equipment are two of the largest categories for import to the UK from the US. Although performance among some of the automakers has been better recently, stocks like Ford (F) could languish at resistance if the pound falls further. Electrical equipment makers like Emerson Electric (EMR) are similarly at risk.

The Brexit situation and Theresa May’s future will likely be a moving target for investors on a day to day basis through the first week of June. Watching the GBP should give us some insight into the risk of additional market volatility. If the GBP breaks support below $1.26 dollars per pound, a bigger reaction in the stock market is more likely.

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Bottom Line – Risks are rising but not systemic

The risks from the trade war and Brexit can be unnerving and I expect it will continue to keep market volatility elevated in the short-term. However, despite those risks, the downside potential is likely to be limited in the short-term. Further accommodation by the Fed, consumer spending, hiring, and revenue growth are still positive enough to justify an optimistic outlook in the short-term.

In my view, analyzing the external risks of the US/China trade war and Brexit through stocks that have direct exposure to those unknowns is the most useful strategy. Focusing on domestic stocks as a whole isn’t as productive because the large-scale effects will be difficult to predict at that level.

Note – Bloomberg: Huawei is the long fuse in Trump’s trade war

Huawei’s Ticking Time Bomb

President Donald Trump’s attack on Huawei Technologies Co. is the trade war’s slowest-burning weapon.

It’s been a week since Trump triggered the device with an executive order, aimed at Huawei, banning national-security threats from selling equipment in the U.S., and with a Commerce Department blacklist keeping U.S. equipment makers from selling to Huawei. The implications for global industry keep unfolding.

U.S. stocks, which actually rose on the day of Trump’s order, fell today, apparently on news Trump has more Chinese firms in his sights. High on the list is Hangzhou Hikvision Digital Technology Co., the top maker of equipment for China’s national panopticon. Anjani Trivedi notes Hikvision has been implicated in the tracking and internment of Uighurs. If Trump is serious about cracking down on this mistreatment, Anjani writes, then many more companies, including big American ones, could be dragged into the war.

British telecom giants BT Group Plc and Vodafone Group Plc today said they wouldn’t sell Huawei 5G-enabled phones. This is surprising and devastating news for HuaweiAlex Webb notes, as it’s short of big foreign markets for its 5G equipment. Trump’s Huawei attack is scrambling tech plans and supply chains around the world, writes Mohamed El-Erian, which could devastate China’s economy unless it’s resolved quickly. Even then, Mohamed writes, global faith in Chinese products will be shaken.

China probably won’t go quietly, as

Xi Jinping’s call for “a new Long March” suggests. It could cause global supply-chain trouble of its own by hoarding rare earths and battery minerals, writes David Fickling. But any pain the Huawei fight causes Americans would be worth it, writes Eli Lake, because the company is such a threat to national security. Eli argues Trump should keep the Huawei ban in place even if there’s a trade deal.

The trouble is that Trump is himself a bit of a ticking time bomb. Hal Brands writes the Huawei threat will be more effective if allies join in, as BT and Vodafone did today. But Trump has alienated many allies, who also must consider the risk he’ll back down as he did with ZTE Corp. last year. Hal suggests that would further damage his, and America’s, credibility.

Retail Death Watch Resumes

The slow death of the department store is one of the oldest stories in business journalism. But last year struggling retailers such as J.C. Penney Co. Inc. and Macy’s Inc. upset the narrative with solid holiday results suggesting they might yet survive. A year later, the old story is back: Department stores have resumed strugglingSarah Halzack notes, raising new questions about their relevance, just in time for a global trade war.

Where are their sales going? Amazon.com Inc. is the prime suspect. But Sarah, in a second column, writes another place to look is big-box stores such as Target Corp. and Walmart Inc., which just keep racking up strong sales growth. They even seem able to handle a trade war, Sarah writes.

It helps that both Target and Walmart have upgraded their technology. For a cautionary tale of what happens when you don’t, a very busy Sarah writes in a third column, check out the technological nightmare that was Lowe’s Cos. Inc.’s latest quarter.

No-Deal Brexit Risk Rises

Speaking of disasters, Theresa May’s premiership kept stumbling toward an early grave today, with her last-ditch effort to pass a Brexit plan DOA, another cabinet minister quitting and Tories pressuring her to resign. This raises the risk of a no-deal Brexit, which most economists agree would be the worst outcome for the U.K. and the pound, John Authers notes. It would not bother Brexiteer and Milkshake Magnet Nigel Farage and his supporters in hard-hit British towns, who yearn for a no-deal Brexit. Therese Raphael spent some time with the Brexit base recently and witnessed the pull of Farage’s simple message.

A Better Tax Plan

If you need something done for free, maybe don’t get a profit-seeking company to do it. The IRS several years ago outsourced to private companies the job of offering free, easy tax preparation to low-income Americans. Somehow, barely any low-income Americans eligible for the free service actually get it. It’s time for the IRS to take over the job, Bloomberg’s editorial board writes. The agency needs a tech upgrade anyway, and this should be part of it.

Telltale Charts

Climate change will end Ryanair’s cheap-flight business model, writes Chris Bryant.

WeWork junk bonds are losing their IPO-news pop as investors fret over the downside, of which there seems to be a lot, writes Brian Chappatta.