The Fourth of July fireworks will come a few days early this year for traders.
A number of assets, from tech stocks to commodities, are likely to react positively on Monday to the outcome of this weekend’s trade talks between President Trump and Chinese President Xi Jinping. Financial markets may not be quite as exuberant in coming days and weeks, though, as investors digest the longer-term implications of the meeting.
The most obvious winners from the summit’s aftermath will be U.S. technology companies with direct or indirect exposure to embattled Chinese telecom giant Huawei Technologies Co. In remarks following the meeting, Mr. Trump said that U.S. companies would be able to sell equipment to Huawei that has “not a great national-emergency problem with it.” Though the U.S. and other western nations may forgo buying allegedly compromised Huawei equipment, software and chip companies may keep supplying it. Expect the likes of Qualcomm, Intel, Nvidia , Advanced Micro DevicesAMD -1.20% and Broadcom AVGO 0.75% to rally sharply.
Another leg of the deal involves U.S. agricultural products. Mr. Trump said the Chinese had agreed to buy “tremendous amounts of food” and that “we’re going to give them a list.” The U.S. Department of Agriculture noted that China made a massive purchase of U.S. soybeans a day before the meeting. Expect futures markets to get a jolt with some benefit to companies such as Deere & Co. and The Mosaic Co. that supply them.
Stocks overall are likely to rise on the benign outcome of the talks. The question, though, is whether the gains will last, even for the sectors most likely to benefit. U.S. equity markets just closed out their best June in over 60 years and their best first half in over 20 largely on expectations that the Federal Reserve is set to come to the rescue with rate cuts. June began with a surprisingly weak U.S. payrolls number that, coupled with trade concerns and a slew of tepid U.S. manufacturing reports, has made a July rate cut a virtual certainty based on futures bets.
The tail may be wagging the dog, though—markets seem to care more about a dovish Fed than the reasons for it. Even following the catharsis from this weekend’s trade talks, it would still take a dramatically stronger June jobs figure this Friday to tip the scales in favor of standing pat at the Fed’s July meeting. Reduced tensions could certainly alter the prospects for another cut later in 2019, though.
Furthermore, recent signs of manufacturing weakness can’t all be chalked up to China uncertainty.
There has been a real slowdown already. The sharply inverted bond yield curve of recent months typically has presaged a recession, not just concern over a single disruptive issue on the horizon.
Even chip stocks and agricultural commodities could give back gains. The Philadelphia Semiconductor Index is up by nearly 28% this year despite the Huawei tensions amid mixed news such as weakness in data-center demand. In the longer run, U.S. threats to cripple telecommunication equipment companies ZTE and Huawei have given China a strong incentive to become self-sufficient in key technologies, which could ultimately hurt the business prospects of U.S. tech companies.
U.S. agricultural-equipment and service firms will welcome the reprieve with China, but the Farm Belt’s buying power has taken a hit recently from other concerns such as flooding. And agricultural commodities are fungible, meaning that a shift in Chinese buying to U.S. suppliers doesn’t mean an increase in overall demand world-wide. Indeed, the knock-on effects of China’s current swine-fever scare could depress demand for corn and soy globally.
Finally, tariffs on a quarter trillion of Chinese goods remain in place and those on an additional $325 billion aren’t off the table. The most fundamental issues such as intellectual property protection remain unresolved. This means existing frictions and general uncertainty will keep acting as sand in the gears of global growth.
Write to Spencer Jakab at spencer.jakab@wsj.com