In this edition of Market Factors we’ll start with the reasons why the White House is starting trade negotiations with China on the back foot. Next we’ll provide top stock picks for a sector enjoying its “biggest catalyst” in years and outline a simple test predicting chronic conditions for the elderly.
Chinese President Xi Jinping and U.S. President Donald TrumpTINGSHU WANG/AFP/Getty Images
Trade
China calls Trump’s bluff
China bemusedly withstood the White House’s trade-related bluster and now has U.S. negotiators on the back foot. A U.S.-China trade war has negative consequences for both global investors and the U.S. economy.
President Donald Trump confidently declared that the U.S. held all the important cards with respect to China trade but as CIBC deputy chief economist Benjamin Tal notes, China has called his bluff.
Mr. Tal believes that the White House underestimated China’s leverage. He wrote that “In a long-lasting trade war, China might have the upper hand.”
China has been de-emphasizing exports to the U.S. Over the past 15 years, trade between China and the U.S. has barely increased while Chinese exports to the rest of the world are up 80 per cent. Chinese trade negotiators can at least threaten ambivalence where trade with the Americans is concerned.
Rare earth metals are a well-publicized bargaining chip for China as the country accounts for 60 to 70 per cent of production and 80 to 90 per cent of refining. (In the latter case, this is in many instances a case of environmental arbitrage, as a lot of rare earth refining is extremely damaging to the environment and China is one of the few countries where regulation is lax enough to allow it).
Mr. Tal also mentions pharmaceuticals as another leverage point favouring China. For example, China produces 90 per cent of global antibiotic API (active pharmaceutical ingredient).
Chinese tariffs are already having a significant effect on U.S. small businesses. Business Insider might be prone to hyperbole at times but their April headline 80% of Small Businesses That Buy From China Will Die provides a good idea of the economic damage being done.
For larger U.S. corporations, a trade war with China will be felt at the profit margin level as inputs from China get more expensive or companies are forced to change their supply chains to emphasize countries where favourable trade deals exist.
The U.S.-imposed deadline for punitive tariffs on Chinese goods was moved to July 9th, a day that is fast approaching. Mr. Tal expects a much gentler tone from the American delegation but it is an open question whether Mr. Trump, now faced with his TACO reputation, is constitutionally capable of concessions.
A general view of LNG Canada's liquified natural gas facility in Kitimat, British Columbia, Canada November 19, 2024.Jennifer Gauthier/Reuters
Energy
Natgas enjoys multiple tailwinds
CIBC energy analyst Jamie Kubik described liquefied natural gas (LNG) demand through the LNG Canada’s Kitimat facility as “the single biggest catalyst for gas producers in years.” He expects an incremental 2 billion cubic feet per day in industry production as a result, a definite tailwind to gas-focused company revenues.
Mr. Kubik’s top picks in the sector are Kelt Exploration Ltd. (KEL-T) and NuVista Energy Ltd. (NVA-T). In the first case, Kelt has new properties coming online that will raise production growth by 36 per cent in 2025 and another 22 per cent in 2026. The analyst believes Kelt is trading at a significant discount to peers.
NuVista Energy is also ramping up production and set to benefit from LNG infrastructure and the expected role of gas in powering new AI-related data centers. NuVista enjoys one of the healthiest balance sheets in the sector and Mr. Kubik expects the company to distribute 75 per cent of free cash flow back to shareholders through share buybacks.
Diversions
A test for the elderly
The SciTechDaily site reported on a study led by the University of Sharjah finding that older people unable to lift a five kilogram weight are more likely to develop chronic lung diseases, hip fractures, joint disorders, high cholesterol, depression, Alzeimer’s disease or suffer strokes.
The study was extensive, with 51,000 post-50 subjects in 15 countries. The connection between muscle weakness and poor health was apparent across gender and 50+ age groups.
The five kilo test will be an important starting point for doctors assessing elder health, a catalyst to begin preventative measures to fight off potential debilitating conditions.
Putting the study into context does, however, bring up a “chicken and egg’ logic issue. Does muscle weakness cause chronic illness or do the habits that caused muscle weakness – cigarette smoking or inactivity, for instance - merely worsen living standards after age 50. That question is not trivial as the answer could determine if someone developing muscle after failing the test can avoid chronic illness.
The essentials
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Globe Investor highlights
David Berman on how Middle East tensions create a bull case for Nutrien
Tom Bradley provides four signs that highlight the abnormal times we’re living in for markets
Tim Shufelt writes on how the AI boom is back
What’s up next
The economic data calendar is highlighted by May’s CPI result on Tuesday when economists expect a 0.5 per cent month over month increase, which translates into 1.7 per cent year over year. An update on GDP for April is out on Friday. Economists expect a flat reading for month over month, which translates into 1.3 per cent growth year over year.
Only one major stock will release profit results in the coming week – Alimentation Couche-Tard is expected to announce earnings of US$0.488 per share on Wednesday.
In Trumpland we have annualized GDP for the first quarter on Thursday, which is expected to contract at 0.2 per cent. Durable goods orders for May are reported the same day and a jump of 6.7 per cent is forecast. Personal spending results for May will be released on Friday – a 0.2 per cent month over month gain is expected. The PCE Price Index for May is also out Friday and a small gain of 0.1 per cent is predicted.
For U.S. earnings, Carnival Corp. (US$0.241 per share forecast) and FedEx Corp. (US$5.876) are out Tuesday. FedEx used to be an economic barometer indicate overall U.S. growth but Amazon.com is cutting orders with them to deliver with their own service, so FedEx is less reliable as a barometer. Nike Inc. (US$0.128) reports Thursday.
See the full earnings and economic calendar here