Here's How to Trade Trump's Next Trade-War Tweet: Taking Stock

(Bloomberg) -- Stock futures are down, though well off overnight lows, as the market braces for more trade war headlines. Trump had a few biting tweets out over the weekend, including one lashing out at the EU ("we will simply apply a Tax on their Cars which freely pour into the U.S.") and another about the state of America's steel and aluminum industry ("Sorry, it's time for a change!"). Meanwhile, Trump trade adviser Peter Navarro made it clear that there are no country exemptions to the tariffs, even for U.S. allies like Canada and Great Britain.

Major company-specific news from the weekend include a wrench thrown into Broadcom's $117 billion bid for Qualcomm (CFIUS issuing an order to delay tomorrow's vote) and reinsurer M&A with France's Axa buying XL Group for more than $15 billion, the largest-ever European acquisition of a U.S. insurer.

The market's focus has shifted quickly from inflation fears, and what the Fed is going to do about it, to the potential for an all-out trade war, and whether the threat from Trump is real or if he is testing the waters to gauge sentiment. The market will be paying close attention over the next few days to retaliatory efforts from the rest of the world, as well as Trump's next steps: Will he lob more insults at our trade partners? Will he ratchet up the call to exit Nafta (as talks come to a close tomorrow)? Will he clarify or walk the stiff tariff levels back?

Until now, stocks haven't felt too much of an impact from the recent noise out of D.C., of which there has been plenty over the past week or so. For example, the confusion over what to do about gun control, Lindsay Graham calling for a war with North Korea, Jared Kushner losing top security clearance, Hope Hicks resigning, The Mooch getting banned, and swirling speculation of key point people in the administration taking their leave, from Gary Cohn and H.R. McMaster to John Kelly and Jeff Sessions.

But given the recent shock from the tariff announcement as well as how the calendar is shaping up (we won't get a major inflationary datapoint until Friday's jobs & wage hike data), we should expect traders to pay much closer attention to the headlines coming out of the Trump administration in the near term. This is especially true if the rumors get louder about someone like Cohn throwing in the towel.

Scenario #1: Trump Escalates Trade War Fears

Here is what could happen if Trump doesn't back down on his tariff call (25% on imported steel, 10% on foreign aluminum) and keeps the potential for a trade war very broad by targeting the entire world instead of singling out a country like China:

• Steel and aluminum stocks resume their vicious rally from last Thursday, when Trump shockingly introduced the tariffs: CLF surged 10%, AKS +9.5%, CENX +7.5%, X +5.8%, STLD +4%, and so on
• NAFTA-exposed names take it further on the chin as the market turns sour on the prospects for a renegotiated pact; this would include the rails (especially KSU and the Canadians like CNI and CP), the autos (GM, FCAU, etc) and the auto parts companies (like MGA and LEA)
• Semiconductors with exposure to China (NVDA, MU, AMD, INTC) could come under further pressure given read-across to some of Trump's past comments on the tech industry and whether he may decide to crack down on alleged intellectual property theft
• Watch for rotation into small caps (Russell 2000 clear outperformer in past two sessions) and sectors that are more insulated to a potential trade war like biotechs (IBB ETF up 2.4% on Friday) and the banks
• Focus on single-name stocks that have low exposure to a trade war; on Friday, Fundstrat's Tom Lee put out a bullish buy-the-dip note on equities where he listed 20 stocks that fit the bill given low export as percent of sales and low international sourcing as percent of COGS; included HSY, MSI, and a bunch of energy and healthcare names like EOG, HES, PXD, ALXN, AMGN, BIIB, and GILD
• And some will just stick with what has worked, for example NFLX (which rose 5.3% last week to completely shrug off any weakness in FAANG or the SPX) and AMZN (which was flat last week); these two are up 57% and 28% year-to-date, respectively

Scenario #2: Trade War Fears Are Scaled Back

Here's what might happen if Trump caves in from all of the negativity surrounding the tariff announcement and walks back some of his comments from last week:

• We'll likely see a reversal in some of the actions mentioned above, for example the metal stocks pare some of their tariff-fueled gains while the Nafta names, especially the autos, catch a relief rally
• Expect strength in names that got hit late last week on speculation of how the tariffs might crimp margins, for instance heavy machinery like CAT, DE, TEX, MTW and truck machinery like CMI and PCAR
  • Sidenote: Truck machinery names got some good news late Friday night after preliminary Class 8 data for February showed elevated demand (positive for CMI, PCAR, and NAV)
• May also see outperformance in HOG, which got caught in the crossfire of potential retaliation from the EU

Tick-by-Tick Guide to Today's Actionable Events

• 8:55am -- IPG at Deutsche media conference (weak on WPP forecast cut)
• 9:30am -- FLT at Raymond James conference (news last week of Ripple tie-up)
• 9:45am -- Markit PMI
• 9:35am -- LGF/A at Deutsche conf. (recent M&A speculation)
• 10:00am -- ISM Non-Manufacturing
• 11:55am -- CMCSA at Deutsche conf. (comments on Sky deal?)
• 1:15pm -- Fed's Quarles speaks on foreign bank regulation
• 1:40pm -- VIAB at Deutsche conf. (comments on possible CBS deal?)
• 1:40pm -- KSU at Raymond James conf. (NAFTA-exposed rail stock)
• 1:40pm -- MYL at Raymond James conf. (botox deal last week impacted AGN shares)
• 3:00pm -- WPP at Deutsche conf. (sold off last week on forecast cut)
• 4:30pm (roughly) -- RYI earnings (interesting given steel tariff news)
• 5:00pm (roughly) -- EGLE earnings (possible read-through to drybulk stocks)
• Post-market -- YY earnings ($8.4b market cap China Internet stock)
• This week -- Several major industry conferences are going on this week, such as CERAWeek in Houston (energy CEOs from Saudi Aramco, BP, Shell will present), the PDCA minerals exploration convention in Toronto, the ISTAT Americas aviation conference in San Diego and BitcoinCRE in NYC

To contact the reporter on this story: Arie Shapira in New York at ashapira3@bloomberg.net.

To contact the editors responsible for this story: Chris Nagi at chrisnagi@bloomberg.net, Joanna Ossinger

©2018 Bloomberg L.P.

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