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Market Update – Week of May 24th


The Newday Team - Newday

May Exits Brexit

The term Brexit is a shorthand way of saying the United Kingdom leaving the European Union–the economic and political partnership involving 28 European countries. A referendum––a vote in which everyone of voting age can take part––was held in June 2016 to decide whether the UK should leave or remain in the European Union. Leave won by a couple of percentages, with strong rejection from Scotland and Northern Ireland. The UK was due to leave on March 29, 2019, but the withdrawal agreement reached between the European Union and the UK had been rejected three times by UK officials. The first extension was due on April 12, 2019, and was postponed to October 31, 2019. The UK can still leave before the extension if the withdrawal agreement is ratified by the UK and the EU before then. Brexit can still be canceled but it requires a change in law in the UK. Theresa May, the Prime Minister of the United Kingdom and the leader of the Conservative Party, previously mentioned she wanted the UK to leave by May 22nd. Yesterday, Theresa May announced that she would quit as British Prime Minister once her Conservative Party chooses her successor. To succeed, the successor will have to find consensus in parliament where Theresa May hasn’t.

 

Trade Tensions Continue

Amidst the ongoing talks between the U.S. and China, the markets have been moving more frequently during the trading hours. Despite the volatility, markets have ended well off their lower price levels. We believe the window to resolve the trade dispute between the two countries is narrowing, which may have negative effects for the global economy given talks stall and no deal is agreed upon. Although economic data continues to indicate that the U.S. economy is solid, many market participants worry that trade tariffs will stagnate corporate profit growth and broader economic expansion. As a consequence, stocks like Apple (AAPL) and Deere (DE) fell while the price of oil sunk below $60 a barrel.

 

New Fronts

Trade war has opened new fronts and for the first time may hit consumer goods including smartphones and computers. The U.S. is considering expanding its blacklist to more tech companies. Huawei, the largest telecom supplier and number 2 smartphone maker, raised concerns due to its intimacy with the Chinese government and fears that its equipment could be used to spy on other countries and companies. Early in January this year, the U.S. had 23 indictments against the company, following previous executive actions against the company due to national security concerns. This week, Huawei was effectively banned from US communications networks. The Commerce Department is reviewing whether other Chinese companies should join Huawei on its entity list. U.S. companies will need a special license to do business with such firms.

 

Farm-Aid Program

President Trump rolled out a $16 billion plan to help farmers hit by the trade conflict with China. It consists of direct payments to U.S. farmers hit hard by the retaliation of the Chinese on crops. Produce most affected by the tariffs were soybeans, corn, and sorghum. While some farm groups cheered the new aid package, saying it would help cushion the impact, farmers themselves would have preferred to have trade than aid. The money will be distributed based on USDA’s estimate of the economic damage inflicted on different countries.

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