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Charles Schwab: Stock Buyback Blackout, Trade Jitters Drive Volatility

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President Donald Trump's tough talk on trade with China will be on full display later this week as tariffs on goods coming from China are expected to kick in on July 6. With China promising to retaliate equally, stocks in the U.S. and overseas have been declining.

But what may temper the blow from punishing tariffs could be a move by the White House to enable Chinese telecom company ZTE Corporation (ZTCOF) to purchase U.S. tech equipment again as well as Trump's less strict decision when it comes to investments by Chinese companies in U.S. technology companies. After all, even if Trump is tough on M&A, it may not be that big of a deal to Chinese companies anyway.

"Chinese M&A of U.S. firms peaked in 2016 and fell sharply a while ago," said Jeffrey Kleintop, chief global investment strategist at Charles Schwab, in an email interview with Investopedia. "Second, a potential deal to let Chinese telecom company ZTE buy U.S. tech equipment may ease tensions somewhat over a potential ban on such sales."

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China Tariffs Kick In at End of Week

President Trump has long threatened to place tariffs on China, arguing that the country steals the intellectual property of tech companies in the U.S. and as a result should be punished. Trump previously announced a 25% tariff of up to $50 billion of Chinese products starting on July 6, while China in response will place tariffs on $34 billion of American goods coming into the country. Meanwhile, on Sunday, July 1, Canada began to impose tariffs on billions of dollars of goods from the U.S. as a retaliatory measure in the wake of Trump's aluminum and steel tariffs.

On top of all that, reports surfaced last week that the White House was planning on preventing Chinese companies from buying U.S. technology companies via the International Emergency Economic Powers Act of 1977, which gives the president broad authority to engage in acts to protect the citizens of the U.S. The Trump administration is now signaling that it will ask Congress to give more power to the Committee on Foreign Investments (CFIUS) to deal with foreign-owned companies purchasing U.S. tech firms.

As for ZTE, the Chinese telecommunications company, lots of industry watchers, including Kleintop of The Charles Schwab Corporation (SCHW), think that if ZTE is once again allowed to purchase U.S. equipment, it could ratchet down the tensions between the two countries. In an effort to get the White House to lift the ban, ZTE just replaced its entire 14-member board with a slimmed-down eight and named Li Zixue, the deputy director of the Xi'an Microelectronics Technology Institute, as chairman.

Stock Buyback Blackout Also Adding to Volatility

Also weighing on the volatility in the stock market, according to Schwab's Kleintop, is the start of the buyback blackout period for lots of companies, which typically kicks in five weeks before they report quarterly earnings and lasts until 48 hours after the report. "With the peak in the second quarter earnings reporting season about five weeks away, we may be losing the buying support from corporations," said the Schwab strategist. "A potential offset to the blackout of corporate buying is that individual investors have been net buyers of ETFs and mutual funds that invest in U.S. and international stocks in five of the past six weeks despite the trade worries."

Owing in part to President Donald Trump's tax reform, which cut the corporate tax rate to 21% from 35%, companies listed in the S&P 500 Index boosted stock buybacks, setting a new record for the group during the first quarter. Citing data from S&P Dow Jones Indices, Barron's reported that S&P 500 companies bought back $189.1 billion of shares during the first three months of the year. The amount surpassed the old record hit in the third quarter of 2007 by close to 10%, noted Barron's.

According to Barron's, tech companies represented one-third of all the share repurchases during the first quarter, coming in at $63.4 billion. Meanwhile, the healthcare industry accounted for $35.6 billion in stock buybacks, landing in second place. Financial companies in the S&P Index came in third place with cumulative share repurchases of $33.8 billion.

Read more:  Investopedia


Does anyone remember 2007???


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