Tech Stocks Feel Brunt of Market Sell-Off

Equities markets yesterday suffered a broad sell-off as trade tensions between the U.S. and China flared again following a period of more reconciliatory tones from Donald Trump had fostered a degree of optimism progress might be made. Tech stocks, followed by the finance sector, took the brunt of the losses as the Nasdaq lost 3.47% and the S&P 500 a fraction under 3%.

The biggest tech stocks, Microsoft, Amazon, Apple, Facebook and Alphabet sustained a combined $162 billion drop in market capitalisation as they all dropped within a 2% to 5% range. Apple, which generates around 20% of its revenues in China took a 5% hit. The Philadelphia semiconductor index lost 4%.

The latest sell-off is a consequence of market nerves being frayed by the latest trade war tit-for-tat between the USA and China. A little over a month ago optimism rose when Donald Trump stated at the G20 summit in South Korea that trade talks between the two economic juggernauts would recommence. But those hopes quickly faded and last week Trump announced the imposition of new 10% tariffs on another $300 billion of Chinese imports into the USA, commencing from September 1^st.

China has responded to that by allowing the renminbi to slide to its lowest level against the dollar in decade. The move has been interpreted as China flexing its muscles in answer to Trump’s move. The renminbi barely moved against a trade-weighted basket of currencies and its drop against the dollar, carefully judged to break just below the ‘red line’ psychological barrier of 7 renminbi, was clearly a calculated move.

Quoted in the Washington Post, Steve Stovall of CFRA Research, commented:

“The Chinese have retaliated against the U.S.'s proposed 10 percent tariff by lowering the value of its currency — the yuan — below the psychologically important 7-yuan-per-dollar level. By weakening their currency, China is attempting to offset the effects of the 10 percent tariff, since a weaker currency makes the cost of China’s exports more affordable around the globe, while causing the cost of U.S. imports into China to go up.”

Other analysts disagree, noting that the drop in value was not large enough to make a significant difference to the attractiveness of Chinese exports internationally. But was just enough to make a clear statement to the USA that China has plenty in its armoury to fight back and won’t take any new escalation without a response.

With August traditionally a tough month for markets, the full extent of the pain may not yet have been felt and investors will be eyeing the next few weeks with some trepidation. Companies, particularly tech companies, with a high level of exposure to China are likely to be worst hit by any correction continuing over the next days and weeks.