Will Trump Cave On China Trade Negotiations After Apple's Collapse And The Stock Market Slide?

Apple and the stock market have been on a roller coaster the past three months with the past two days being especially wild. Apple pre-announcing a significant shortfall to its December quarter results late Wednesday afternoon led to its stock falling $15.73 or 10% on Thursday to $142 and helped the Dow falling 2.8%, or 660 points, to 22,686. Apple was responsible for 108 points of the Dow’s drop after attributing a large portion of its financial underperformance to weak sales in China with Tim Cook, Apple’s CEO, saying that trade tensions were partly to blame.

The markets rebounded on Friday from a combination of a stronger than expected jobs report and Fed Chairman Powell seeming to be more dovish on rate increases this year at the American Economic Association’s meeting. Note that the strong employment numbers of 312,000 for December along with October and November’s numbers being revised upwards by 58,000 hurts the case for no or fewer than expected rate increases this year.

Apple bounced back some, rising $6 or 4.2%, but is still down 6% over two days. Apple is down $84 or 36% from its all-time high in October, which has contributed 577 points to the Dow Industrials falling 3,395 points or 17% of the plunge the past three months.

The Dow increased 747 points on Friday making up Thursday’s entire slide and is up 87 points or 0.4% since Wednesday’s close. The Dow Industrials is now down 14.5%, or 3,395 points, from its October 3 high of 26,828.

Trump, the stock market and trade

President Trump pays extremely close attention to the stock market as he views it as a scorecard on his Presidency and an indicator on how likely he is to be re-elected. The Dow and S&P 500 are up 28% and 18%, respectively, since his election, but they were higher by 46% and 37%, respectively, at their highs, which has caused Trump to not talk about the markets over the past few months. Trump took credit for the stock market on the way up but has tried to distance himself from its decline by blaming the Fed and anyone else he can think of.

If the markets continue to slide and other companies show similar weakness in China , I don’t think Trump will be able to hold out for a huge trade deal . China will offer up just enough along the lines of opening up some of its markets, lowering some tariffs and loosening investment restrictions that Trump can say he negotiated the “Biggest Trade Deal Ever.” However, by letting the stock market be his guidepost he will probably capitulate without making nearly the strides he could if he didn’t let the day-to-day or month-to-month market movements affect him.

China plays the long game and Trump is purely transactional

Chinese leaders think in decades while Trump is pretty much looking for his next (or any) “win” so he can tweet about it. China has created 13 five-year economic plans since 1953, and its “Made in China 2025” industrial policy launched in 2015 aims to make the country a leader in multiple high-tech sectors.

China is willing to endure much more economic pain that Trump. China is also well aware of Trump’s political challenges ranging from the Democrats controlling the House and the investigations it will launch, the Mueller investigation and the declining stock market. China also realizes how Trump obsesses over his image, the stock markets AND that he wants to boast of winning.

They also know that Trump representatives really can’t speak for him or agree to a deal since Trump may change his mind at the last moment (and multiple times). China has also seen how world leaders can manipulate him. The most recent example is Turkey’s President Erdogan who convinced Trump to pull out of Syria, stranding multiple American allies.

It is unfortunate, and a detriment to containing China, that Trump withdrew from the TPP or the Trans-Pacific Partnership. While he wants to strike one-on-one trade deals, the TPP would have helped provide leverage over China since it would have coordinated pressure from the U.S. and countries such as Australia, Canada, Japan and Mexico.

Is Apple the canary in the coal mine?

In a press release Tim Cook, Apple’s CEO, said that a slowdown in iPhone sales in China was largely responsible for the company lowering its December quarter guidance. He said “most of our revenue shortfall to our guidance, and over 100 percent of our year-over-year worldwide revenue decline, occurred in Greater China across iPhone, Mac and iPad.”

Cook added “We believe the economic environment in China has been further impacted by rising trade tensions with the United States. As the climate of mounting uncertainty weighed on financial markets, the effects appeared to reach consumers as well, with traffic to our retail stores and our channel partners in China declining as the quarter progressed.”

In fiscal 2018 ending in September China generated almost $52 billion in sales or 20% of Apple’s total revenue. It also contributed almost $20 billion of Apple’s operating income or 22% of the total. Even though Apple is responsible for about 1 million jobs in China, this may not be enough of a safety factor if the Chinese government decides it wants to negatively impact the company due to Trump’s actions.

Soybean prices have barely recovered

It has been over a month since Trump and President Xi had dinner in Brazil to discuss trade. Besides a 90-day ceasefire, China “promised” that it would step up its soybean purchases.

There was an initial jump in soybean prices (lower blue circle in the chart below, the top blue circle is when Trump started the tariff war) due to the anticipated purchases, but there hasn’t been any significant additional increase. This should have happened if there was any substantial change in China’s buying unless American farmers had stockpiled so many that it will take a while until these are worked off.

One portion of China’s “Made in China 2025” plan is agricultural technology. I believe the country will become even more focused on this segment so that it will become less dependent on soybean imports as its leaders realize the dependency it has on other countries food production. Trump’s starting a trade war with China could have tremendous long-term negative impacts on American farmers.