Market Outlook – April 23, 2018

IMF Calls for U.S. & China to Work on Free Trade Framework


Christine Lagarde, chief of the International Monetary Fund (IMF) has called on the United States and China to resolve their impending trade disputes through the use of existing multilateral provisions and organizations.

The IMF Chief said that Washington and Beijing should work on the basis of free trade and within the framework of the rules-based multilateral institutions. There are reports that U.S. Treasury Secretary Steven Mnuchin is considering making an official trip to China to discuss economic and trade issues. China’s Ministry of Commerce welcomes the reports.

U.S. Fund Managers Shifts to Smaller Companies


With the looming all-out trade war between the United States and China, U.S. stock fund managers are prompted to shift strategies and hunt for companies that can easily pass on higher costs to their consumers.

Most domestic small-to-mid-cap companies that derive bulk of their revenues at home have overcome higher trade costs as seen from the Russell 2000 index of smaller companies. The companies are up 2.8% in 2018 which is nearly double the 1.5% gain in the larger-cap and more internationally-exposed S&P 500 index over the same period.

The fund managers say that a trade war is expected to push inflation higher and eat into the margins of even those domestic companies that get no revenues from abroad. These managers are starting to target firms that have established niches or intellectual property that will allow them to protect or even expand their margins at a time of rising costs.

Chinese Fund Managers Reduces ZTE Valuations


As a reaction to the 7-year ban of sales by American firms, Chinese fund managers have slashed valuations of ZTE Corp. The United States imposed the ban after discovering that the Chinese equipment maker illegally shipped U.S. goods to Iran. ZTE complained that the sales ban threatened its very survival.

Chinese mutual fund managers announced over the weekend that they cut the value of ZTE’s stock in their portfolios by 20%-30%. ZTE suspended trading in mainland China and Hong Kong on April 17.  Around 40 Chinese mutual funds have adjusted the valuation of ZTE ever since trading of the stock was suspended.

New Wage Deal Averts GM South Korea’s Bankruptcy Plan


The South Korean unit of General Motors Co. (GM) dropped a plan for a vote on a bankruptcy filing on Monday.  The GM unit reached a tentative wage deal with its labor union. As result, the U.S. automaker was able to win concessions on pay, bonuses and benefits.

At a news conference after the deal, Hong Young-pyo, a lawmaker of the ruling Democratic Party who mediated the agreement said, “The labor union made huge concessions to save the company.”

Union representatives were absent from the press conference where Hong and GM executives were present. A union spokesman declined to comment. The union members will be voting  on the preliminary deal on Wednesday and Thursday.

Alibaba Cuts Customer Traffic to U.S. Clothing Company


Two executives of a well-known U.S.-brand clothing company told The Associated Press that Alibaba’s (BABA) Tmall is punishing them for refusing to an exclusive contract. The unnamed U.S. clothing company opted to participate in a promotion sponsored by BABA’s archrival Inc. (JD).

The U.S. store was expecting a 20% increase in online sales on Alibaba’s Tmall. Their sales suddenly dropped by 10% to 20%.  Tmall removed their advertising banners from prominent spots in Tmall sales showrooms. Their special sales and products were also blocked from appearing in top search results.

Alibaba denied manipulating online traffic and punishing companies that refuse to sign exclusive contracts. Alibaba said pursuing exclusive deals is a common industry practice and called the charges of coercion “completely false”. The complaining executives spoke on condition of anonymity for fear of reprisals.

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