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US stock futures zoomed higher this morning after a spokesman for China’s Ministry of Commerce told reporters that Beijing and Washington have discussed rolling back tariffs.
The spokesman, Gao Feng, stipulated that the United States and China must simultaneously cancel tariffs on each other before any “phase one” deal is signed.
The statement was welcomed by US investors who had a negative reaction Wednesday to a Reuters report warning that a “phase one” trade deal could be delayed until December.
The upshot: Investors should expect more uncertainty over when a potential deal will be signed, and, more importantly, the substance of the agreement. But the general tone in Washington and Beijing is positive.
“I can’t escape the feeling that President Trump likes a ‘two-step forwards, one step backwards’ approach to negotiations,” mused Societe Generale strategist Kit Juckes. “Anyway, the erratic newsflow doesn’t mean progress isn’t being made and in that regard some optimism is warranted.”
There is a compelling argument to be made that even a deal that removes some tariffs won’t be a game changer for stocks or the global economy. Here’s Simona Gambarini of Capital Economics:
“Even if a ‘mini-deal’ is finalised, tensions surrounding trade are unlikely to go away completely. Some of the more controversial issues, like currency manipulation, are yet to be addressed,” said Gambarini.
“And in any case, there is more to the rift between the US and China than trade alone. China’s rapid emergence as an economic superpower makes it a threat to the US. As such, the decoupling between the two countries will continue.”
According to Capital Economics, the upside for stocks is limited because investors have already factored a deal into current share prices. Meanwhile, the latest economic data suggest the US and Chinese economies are both in for more pain ahead.
Who invests in Aramco’s IPO — and at what price?
Saudi Aramco makes more money than any other company on Earth. But low oil prices, the climate crisis and geopolitical risk could deter international investors from buying into its mammoth IPO. More details of the partial privatization are expected in the coming days.
The biggest risk lies with Aramco’s core business: oil. Demand growth for crude is slowing — an inconvenient truth for bankers pitching the monopoly at a valuation of up to $2 trillion. Add growing pressure on institutional investors to ditch oil assets, as well as a tough political environment in the Middle East …. and the investment case for Aramco weakens.
“It’s hard to see how the company grows over time,” Anish Kapadia, director of energy at Palissy Advisors, an investment advisory firm based in London, told me.
The bull case: Aramco, which could reportedly list a stake as large as 5%, sits on massive crude reserves. It posted a $68 billion profit for the first nine months of 2019. The company has also committed to an annual dividend of at least $75 billion through 2024.
But Crown Prince Mohammad bin Salman has reportedly sought a valuation for Aramco near $2 trillion. The model run by Palissy Advisors puts Aramco’s value at just $1 trillion. That’s a massive range — and some investors will worry about overpaying.
“It’s essentially a one-product company, and the price of that product is very volatile,” Tarek Fadlallah, chief executive of the Middle East unit of Nomura Asset Management, told me.
He expects the IPO to go off with a valuation between $1.6 trillion and $1.8 trillion — but notes that the process of signing up investors won’t be straightforward. That’s in part due to growing climate concerns.
Uber’s stock hits a record low
The end of Uber’s lockup period was bad news for the company’s shares. Really bad.
Stock in the ride-hailing company hit a record low of $25.58 on Wednesday as insiders were allowed to start selling their holdings, my CNN Business colleague Sara Ashley O’Brien reports. Shares bounced back to nearly $27 per share — but that’s still 40% lower than Uber’s IPO price of $45.
Dan Ives, an analyst at Wedbush Securities, thinks the clouds could lift after this week. “It’s been dark days for Uber but after this week, the lockup overhang will be in the rear view mirror and the stock should rebound from here,” he said.
Of course, that’s if investors decide to ditch concerns about the company’s history of losses, stiff competition and the viability of lines of business like Uber Eats.
Earnings continue. AMC Entertainment, ArcelorMittal, Keurig Dr. Pepper, Ralph Lauren and SeaWorld Entertainment report before US markets open. Activision Blizzard, Disney, Dropbox, GoPro, Lions Gate Entertainment, Yelp and Zillow follow after the close.
Also today →
Coming tomorrow: China releases balance of trade data at a pivotal moment in negotiations with the United States.