Escalation of the trade war, falling stocks of airlines


Stocks of US airlines fell sharply on August 23. The industry seems to be under the weight of the growing trade war and concerns about economic growth. Although global economic factors do not have a direct impact on the air transport sector, they have a long-term impact.

Escalation of the trade war, falling stocks of airlines

Shares of most US airlines closed in the red on August 23. Notably, American Airlines (AAL) shares fell the most with a drop of 4.2%. United Airlines (UAL), Delta Air Lines (DAL) and Southwest Airlines (LUV) fell 3.5%, 3% and 1.2%, respectively. The iShares Transportation Average (IYT) ETF fell 3.3%. IYT invests in Dow Jones transportation shares in the United States. About 20% of IYT's portfolio consists of passenger airlines.

Tense trade relations between the United States and China could have a negative impact on long-term airline business passenger traffic. In addition, weaker trade relations could trigger a recession in the global economy. A recession would have a negative impact on the labor market. A smooth job market means less disposable income, which leads people to cancel or postpone their vacation plans.

Climbing the US-China trade war

The rise of trade tensions between the United States and China played a crucial role in the collapse of the stock market. On August 23, the two countries imposed significant tariffs on billions of dollars worth of imported goods.

The first announcement was made by Chinese officials on August 23, according to a report by CNBC. China will collect tariffs of between 5% and 10% on US goods worth $ 75 billion. Rates will be applied in two installments from September 1st to December 15th. China will also apply a 25% tariff on cars imported from the United States and 5% on auto parts and components as of December 15.

Shortly after China's announcement, President Trump retaliated by raising tariffs. According to one New York Times report, President Trump has announced additional tariffs on $ 250 billion of Chinese products ranging from 25% to 30%. He also threatened to raise taxes from 10% to 15% on Chinese goods worth $ 300 billion. Taxes are supposed to start on September 1st.

August 23, President Trump tweeted"China should not have applied new tariffs to $ 75 billion of US products (for political reasons!)." tweeted"We are ordering our major US companies to immediately start looking for an alternative to China, including bringing your business home and making your products in the United States."

Why commercial war?

Since being elected in 2016, President Trump has been trying to reduce the US trade deficit with China. The trade deficit has reached about $ 378 billion in 2018. It also wants to make structural changes to trade between the two largest economies in the world.

President Trump believes that China should stop intellectual property theft and stop granting special subsidies to its public enterprises. The Trump administration wants China to end the technology-sharing rule imposed on US companies.

Since the beginning of 2019, President Trump has been using tariffs to pressure China. Until now, China has imposed duties on billions of dollars of US imports.

On August 23, China retaliated against President Trump's threat to impose 10% duties on Chinese goods worth $ 300 billion earlier this month. China retaliated against President Trump's tariffs twice this year. The country increased tariffs on US imports to $ 60 billion in May. The decision to raise tariffs came after the Trump government imposed a 25% duty on Chinese imports worth $ 250 billion.

Wider market fell

The trade war between the United States and China is likely to intensify further. Neither one nor the other country is ready to back down. The latest tariff announcements sparked a massive sell on August 23 across the entire market. Investors fear that the escalation of the trade war will affect global economic growth.

The top three US indices, the NASDAQ, the S & P 500 and the Dow Jones fell 3%, 2.6% and 2.4%, respectively. With the exception of Boeing (BA), all components of the Dow Jones 30 experienced an intraday decline on August 23 during the session. Boeing shares closed up 0.5% in anticipation of obtaining regulatory safety approval for its 737 MAX struggling in October.

On August 23, technology and industrial stocks fell the most. They are more exposed to the Chinese market. In the technology sector, Apple (AAPL), IBM (IBM) and Microsoft (MSFT) shares fell 4.6%, 3.5% and 3.2%, respectively. Together, they account for nearly 12% of the weight of the Dow Jones 30 component. The SPDR fund in the technology selection sector (XLK) lost 3.3% on August 23rd. XLK invests in S & P 500 technology stocks.

In the industrial sector, 3M (MMM), Caterpillar (CAT) and United Technologies (UTX) shares fell by 3.1%, 3.3% and 3.6%, respectively. Together, they account for 10.4% of the weight of the Dow Jones 30 component. The Industrial Select (XLI) SPDR fund lost 2.7% on August 23rd. XLI invests in the shares of the S & P 500 industrial sector.

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