The top-performing hedge funds are buying GE, Facebook, Biogen

Traders work on the floor of the New York Stock Exchange (NYSE) on February 6, 2018 in New York City.

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Under-the-radar hedge-fund managers beating the market are betting on stocks such as General Electric, Facebook and Biogen this year.

The best-performing hedge funds this year and over the last three years include Aisling Capital, Boxer Capital and RA Capital Management, according to hedge-fund tracking firm

The numbers are not the funds’ outright returns but an estimate of their stock-picking ability. calculated these returns by comparing the performance of equities in the funds with that of a sector exchange-traded fund. The firm grades the stock-picking ability of nearly 1,000 hedge funds in its database with this proprietary indicator of performance called StockAlpha.

These hidden gems emerged as the top 10 hedge funds with strong outperformance this year, as well as over the last three years. With their quarterly filings out last week, here’s a peek at the 10 largest new positions these hedge funds added by the end of the first quarter.

Hedge funds reveal their holdings four time a year in regulatory filings with the Securities and Exchange Commission, and the information is released to the public 45 days after each quarter ends.

Steadfast Capital piled into General Electric, adding more than $153 million worth of shares by the end of the first quarter. The fund also added new bets on PG&E, Burlington Stores and Facebook. Steadfast has $10.6 billion in asset under management and the fund’s stock picks have returned 23.4% year to date, beating the S&P 500’s 14% gain, according to Symmetric.

RA Capital Management and Boxer Capital are focused on health care and biotech companies. RA picked up Sage Therapeutics and Axsome Therapeutics, which are developing drugs for central nervous system disorders. Axsome surged a whopping 751% this year on successful results for one of its drugs, while Sage has risen 79% in 2019.

Boxer added Biogen, which is down more than 21% this year.

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Dividends are an easy way to predict the stock market, Citigroup says

Traders work on the floor of the New York Stock Exchange.

Jeenah Moon | Reuters

Want to know where the stock market is going? Just track dividends, a strategist at Citi Research says.

“Everyone has their favourite theory about what drives equity markets,” strategist Robert Buckland wrote in a note earlier this month. “We think it’s much simpler than that.”

Buckland notes that dividends across global equity markets have increased by 7% on an annualized basis since 2010. Global stocks have shown the same growth.

And by estimating the increase in overall dividends paid by stocks, investors should be able to forecast where stock prices are ultimately headed over the long term, Citi says.

“Sure, sometimes share prices run ahead of dividends and sometimes they lag. But these decouplings don’t last too long,” Buckland said. “The overall historical message is clear: get dividends right and you will get share prices right.”

Based on estimated dividend growth, global equities should return 13% over the next two years, Citi estimates.

Wall Street strategists use complicated models with several inputs to calculate their forecasts, ranging from price-earnings ratios to interest rates, not to mention the short-term headlines that cause strategists to change their forecasts frequently. For example, trade tensions between China and the U.S. flared up earlier in May, causing global stocks to fall more than 3% this month and many strategists have adjusted their forecasts accordingly.

But their long-term forecasting method should be much simpler than that and not account for short-term volatility, Buckland says.

“Maybe short-term sentiment is driven by Fed policy or trade wars or whatever, but in the end equities are doing what they should do — tracking fundamentals,” Buckland said. The strategist does not go into a deeper explanation in his note as to why stock market returns equal dividend growth, just that the relationship has held up over time in many countries’ markets.

The link probably has to do with the fact that dividends accurately portray over the long term the real fundamentals of a company because they represent the actual excess money left over after all the expenses have been paid. What’s interesting is that this relationship holds despite the fact that so many big companies like Amazon do not pay dividends.

To be sure, Buckland warns “there is significant scope for error in these forecasts” as consensus dividend expectations may be wrong, “although they are less likely to be wrong than consensus EPS forecasts.”

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JPMorgan cuts ties with OxyContin maker Purdue Pharma

People pass a sign for JPMorgan Chase at it’s headquarters in Manhattan, New York City.

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J.P. Morgan Chase has ended its relationship with Purdue Pharma over its alleged role in the U.S. opioid crisis, a person familiar with the matter told CNBC on Thursday.

J.P. Morgan, the largest U.S. bank by assets, becomes the most high-profile corporation known to have disassociated itself from the OxyContin maker, forcing Purdue to look for other banks to manage its bills and cash. Reuters first reported the move Thursday.

Purdue, owned by the wealthy Sackler family, faces thousands of lawsuits claiming that the company marketed addictive painkillers while underplaying the risks of abuse and overdose.

The bank’s decision also underscores a drive among U.S. banks to reassess their relationships with clients and industries in response to controversy and political debates over matters such as immigration detention and mass shootings.

After J.P. Morgan informed Purdue in March that it had six months to find another bank, Purdue tapped Dallas-based regional bank Comerica to handle its financial transactions and accounts, sources familiar with the matter told Reuters.

“Purdue is a streamlined organization with an exciting pipeline of new medicines and significant cash reserves,” the company said in a statement. “The company has multiple banking relationships and will not have any interruption to its banking and financial service needs.”

JPMorgan declined to comment.

Reuters contributed to this report.

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Bond market is signaling recession, rate cuts and unending trade war

Traders signal offers in the Ten-Year Treasury Note Options pit at the Chicago Board of Trade.

Scott Olson | | Getty Images

Investors rushed into the safety of bonds Thursday and dumped stocks, as it appeared the trade war could be prolonged and more painful for the world economy than expected.

The moves in the bond market were dramatic, with the 10-year Treasury yield dropping about 8 basis points in its biggest one-day move since April 1. At the same, traders in fed funds futures bet on the Fed making two quarter-point rate cuts by the middle of next year and possibly a third in the second half of 2020.

Yields on some issues, like the 10-year and 30-year bond, fell through the year’s lows, which previously were viewed as a floor but now served as a magnet for buyers, resulting in an even lower yields. The 10-year yield touched 2.29%, the lowest level since October, 2017.

“The market is obviously telling you that it’s quite worried about some of the incoming data, including the PMIs this morning, the ongoing trade rhetoric and the move in risk assets,” said Mark Cabana, head of short U.S. rate strategy at Bank of America Merrill Lynch. Cabana said the market now believes a full blown trade war is coming, with taxes on all of China’s products.

“The concern the market has right now is that we’re moving toward a worst case scenario, and that could persist for quite some time. If that’s the case, then the market is believing the [weak] economic data, and the Fed will likely need to respond to that by trying to offset and prevent a recession,” he said.

The 10-year yield fell below that of the 1-year for the second time this year. The so-called inverted yield curve has been a reliable sign of a recession if the move is sustained. The U.S. market was also following Europe’s bond market. The German bund slipped to a low yield of negative 0.12%, reflecting concerns about the European parliamentary vote.

Wall Street increasingly believes that the Trump administration is prepared to slap tariffs on another $300 billion in Chinese goods, as no new talks are scheduled. China said through its Ministry of Commerce Wednesday that the U.S. should act with sincerity and change its “wrong actions.””

“This is just adjusting to reflect the new normal—very low neutral rates, difficulties achieving inflation and the risk of a recession,” said Jon Hill, Treasury strategist at BMO.

Bond yields, which move opposite price, also fell in sympathy with the sell off in stocks. The Dow ended the day down 286 points, or 1.1% to 25,490. It had been down more than 400 points during the trading day.

“Normally if you had a day like this a couple of weeks ago, there would be somebody from the Trump administration coming out and saying how progress was being made… and it’s crickets along those lines today, and I think that’s evidence of the extent of the tensions and it seems like we are going to see things probably get worse before they can get better,” said Cabana, early in the afternoon.

Later, around 3:50 p.m., President Donald Trump said he thinks things will probably happen fast with China.Though vague, that appeared to help lift stocks, while yields moved off lows.

Wall Street economists and strategists issued more forecasts Thursday incorporating expectations for another round of tariffs. Trump has threatened to put 25% tariffs on the remaining $300 billion in Chinese imports that so far do not have tariffs.

The bond market also reflected growing fears of a softer economy. Yields made an even bigger move lower Thursday after a morning report that the Markit U.S. manufacturing and services composite fell to a 3-year low of 50.9. Markit said growth in business activity slowed in May as trade war worries increased. It also said the increased uncertainty appeared to hurt orders and confidence.

Mike Schumacher, director rate strategy at Wells Fargo, said the move in yields Thursday may have been overdone, and could have been exaggerated by investors who were forced to reposition.

“It’s the lowest it’s been in a long time. You really have to go back to 2016 to get a sustained monster rally like this one,” said Schumacher. He noted that the 10-year yield had reached a high of 3.21 in November of last year, and has now moved 91 basis points in a six month period. In 2016, 10 year moved to 1.36% , in early July, right after the Brexit vote.

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Stocks making the biggest moves after hours: HP, Autodesk, Boeing

The logo of the 3D printer manufacturer HP is seen during the event. Feria de Barcelona hosts the third edition of the (3D) industry week.

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Check out the companies making headlines after the bell:

Shares of HP Inc. rose more than 1% in extended trading after the software company reported second-quarter earnings that beat expectations. The company reported earnings of 53 cents per share on revenue of $14.04 billion, while analysts polled by Refinitiv had expected earnings of 51 cents per share on revenue of $13.97 billion.

Shares of HP Enterprise fell nearly 1% after the information technology company reported mixed second-quarter earnings. The company reported earnings of 42 cents per share, compared with the expected 37 cents per share, and revenue of $7.15 billion, compared with the expected $7.4 billion.

Boeing stock rose nearly 1% in after-hours trading after the Federal Aviation Administration told U.N. aviation agency members on Thursday that it expects Boeing’s grounded 737 Max jets to return to air in the U.S. as early as June. It was not clear Thursday when other countries would clear the flights.

Shares of Intuit rose as much as 3.5% after the software company reported third-quarter earnings that beat expectations. The company reported earnings of $5.55 per share on revenue of $3.27 billion, while analysts had projected earnings of $5.40 per share and revenue of $3.23 billion, according to Refinitiv consensus estimates.

Shares of Autodesk tanked 9% after the software company reported first-quarter earnings that missed estimates. The company reported earnings of 45 cents per share on revenue of $736 million, while Wall Street had expected earnings of 47 cents per share on revenue of $740 million.

Ross Stores stock fell more than 3% in after-hours trading, despite first-quarter earnings that beat on the top and bottom lines. The company reported earnings of $1.13 per share on revenue of 3.80 billion, while Wall Street had expected EPS of $1.12 on revenue of $3.79 billion.

Deckers Outdoor stock jumped more than 4% after the footwear designer reported better-than-expected fourth-quarter revenue and gave strong guidance for the current fiscal year. The company reported earnings of 85 cents per share and revenue of $394 million. Analysts had expected revenue of $379 million.

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Best Buy, Hormel, T-Mobile, Sprint, L Brands & more

Check out the companies making headlines before the bell:

Best Buy — The electronics retailer’s quarterly earnings came in 16 cents a share above estimates at an adjusted $1.02 per share, with revenue beating forecast as well. Comparable-store sales were up 1.1%, beating the 0.9% consensus estimate of analysts surveyed by Refinitiv.

Hormel — Hormel reported adjusted quarterly profit of 46 cents per share, beating estimates by a penny a share. Revenue was short of forecasts, however, and the company also cut its full-year outlook as African Swine Fever impacts its beef and pork markets.

T-Mobile US, Sprint — Sources tell CNBC’s Andrew Ross Sorkin that Justice Department antitrust division head Makan Delrahim has not made a decision on whether to allow the proposed T-Mobile-Sprint deal, despite reports that staff is recommending the deal be blocked.

Medtronic — The medical device maker beat estimates by 8 cents a share, with adjusted quarterly profit of $1.54 per share, with revenue also beating Wall Street forecasts. Medtronic also issued a full-year earnings outlook range that is largely above current consensus.

L Brands — L Brands reported quarterly profit of 14 cents per share, surprising analysts who had expected a breakeven quarter. The Victoria’s Secret parent also raised its outlook for the full year, on the heels of record results for its Bath & Body Works unit.

Avon Products — Avon agreed to be bought by Brazilian cosmetics maker Natura Cosmeticos in a stock swap deal that values Avon at $2 billion. Avon had confirmed Wednesday that the two sides were in acquisition talks.

Boeing — Acting Federal Aviation Administration Chief Dan Elwell said there is no specific timetable for approving the return of Boeing’s grounded 737 Max jet to service. The FAA is meeting with airline regulators from about 30 countries today to discuss the software fix for the jet as well as new pilot training developed by Boeing.

Harley-Davidson — Harley executive Larry Hund told The Wall Street Journal that expanding its loan operation will be a key part of the company’s strategy to attract new and younger motorcycle buyers, as it plans to introduce 100 new models through 2027.

Spotify — Spotify has notified an unspecified number of users that it has reset their passwords, according to a Tech Crunch report. The music streaming service said the reset was due to “detected suspicious activity” but did not elaborate.

NetApp — NetApp reported fiscal fourth quarter profit of $1.22 per share, missing consensus estimates by 4 cents a share, with the data storage company’s revenue also falling short of Wall Street forecasts. NetApp also gave a weaker-than-expected forecast. The company raised its quarterly dividend, however, to 48 cents per share from 40 cents a share.

Deutsche Bank — Deutsche Bank shares fell to a record low as the bank held its annual meeting in Frankfurt. CEO Christian Sewing said he was ready to make “tough cutbacks” to the company’s investment bank, following several restructuring attempts.

Tyson Foods — The meat and poultry processor is in talks to invest billions in Kazakhstan to avoid Chinese tariffs, according to the Financial Times. The talks are set to center around setting up a beef-processing plant, with an initial investment of $200 million.

Chipotle Mexican Grill — The restaurant chain was downgraded to “underperform” from “market perform” at BMO Capital, which said the impact of African Swine Fever on Chipotle’s operations is underappreciated.

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L Brands, Copart, Chipotle & more

Craig Warga | Bloomberg | Getty Images

Check out the companies making headlines midday Thursday:

L Brands — L Brands surged 12.8% after the parent company of Victoria’s Secret and Bath & Body Works reported first-quarter earnings that surpassed expectations. The company reported earnings of 14 cents per share, while analysts polled by Refinitiv expected a break-even quarter.

Target — Target shares rose 2.4% after being upgraded by J.P. Morgan following its strong earnings Wednesday. J.P. Morgan upgraded its rating on the stock to overweight from neutral and hiked its target price to $100 from $81. The bank said Target’s strong fiscal first-quarter earnings, especially its 4.2% growth in same-store sales, prove that the big-box retailer is safe from the threat of e-commerce giant Amazon.

Best Buy — Shares of Best Buy fell 4.8% despite the retailer’s second-quarter earnings beat after the company warned that new tariffs would increase prices for shoppers. The company reported earnings per share of $1.02, topping Wall Street estimates of 86 cents, according to Refinitiv. Best Buy also reaffirmed its full-year forecast.

Tesla — Tesla shares fell as much as 3.4% but later recovered after Loup Ventures co-founder Gene Munster said the electric car maker will probably miss auto delivery expectations this year. Munster lowered his 2019 vehicle delivery estimate by about 10%.

Toro — Shares of lawn mower maker Toro fell more than 5% after it reported disappointing quarterly results. Toro posted earnings per share of $1.17, missing a Refinitiv estimate of $1.19 per share. Revenue came in at $962 million, lower than the $987.8 million forecast. But Toro said for the full-year it estimates earnings per share between $2.90 and $3.00, topping an estimate of $2.83.

Copart — The auto auction company’s stock jumped nearly 8% on quarterly earnings that topped analyst expectations. Copart reported fiscal third-quarter earnings of 81 cents a share. Analysts polled by Refinitiv had forecast a profit of 62 cents a share. The company’s service and vehicle revenues also beat analyst estimates.

Pros Holdings — Shares of the AI platform company climbed 1.6% after an analyst at Stifel upgraded the stock to buy from hold. The analyst also hiked Pros’ price target to $60 per share from $46, citing accelerating revenue growth and an attractive valuation.

Sociedad Quimica y Minera de Chile — The world’s largest lithium producer fell 5.8% on weaker-than-forecast first-quarter results. Sociedad Quimica reported earnings per share of 31 cents on revenue of $504.2 million. Analysts polled by FactSet expected a profit of 38 cents a share on revenue of $521.3 million.

Medtronic — Shares of Medtronic jumped 3.2% after the medical device company reported better-than-expected fiscal fourth-quarter results. Medtronic reported earnings of $1.54 per share on revenue of $8.15 billion. Analysts polled by Refinitiv expected a profit of $1.46 per share on sales of $8.11 billion. The company also gave strong full-year guidance.

Chipotle Mexican Grill — Chipotle Mexican Grill dropped more than 5% after an analyst at BMO Capital Markets downgraded the stock to underperform from market perform. The analyst said Chipotle would be affected by the African swine fever due to its large exposure to pork. The African Swine Fever “will create a meaningful, multi-year upswing in protein prices,” the analyst wrote in a note.

Apple — Apple shares fell 1.7% after UBS lowered its price target on the tech giant to $225 per share from $235. UBS said that Apple faces pressure from the ongoing U.S.-China trade war and slowing smartphone demand.

—CNBC’s Nadine El-Bawab and Maggie Fitzgerald contributed to this report.

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This chart shows how chip stocks are ground zero for the trade war and are feeling the pain

Investors trying to get a gauge on the state of U.S.-China trade relations should look at shares of big chipmakers like Qualcomm, Micron Technology and Broadcom, according to Ned Davis Research.

The firm points out that Qualcomm had 67% of its 2018 revenue come from China, while Micron saw 57.1% of its sales come from the second-largest economy in the world. Broadcom and Texas Instruments have more than 40% revenue exposure to China, while Applied Materials, Intel and Nvidia are all exposed to China by more than 20%.

These stocks, along with Analog Devices and Lam Research, have taken a massive hit ever since the U.S. threatened to hike tariffs on Chinese goods earlier this month. Since May 3, Qualcomm has lost nearly 13% while Micron is down about 18%. The best-performing stock in the group is Applied Materials, which is only down 6.1% in that time yet it is still lagging the S&P 500.

Chip stocks are also under pressure after the U.S. blacklisted Huawei, a Chinese telecom giant that does business with several U.S. tech companies. On May 15, Trump signed an executive order requiring U.S. companies to obtain a license if they wanted to do business with Huawei. The U.S. then issued a 90-day reprieve for Huawei, however.

“A risk for technology companies is that the trend continues, and China retaliates with moves that make it more difficult for U.S. companies to operate in China,” Rob Anderson, investment research analyst at Ned Davis Research, wrote in a note Thursday. “For now, we maintain our market weight recommendation on the sector … We will take our cue from our sector model and monitor the trade situation. We may downgrade the sector to underweight if the trade war causes the overall economy to slow and weakness spreads into software spending.”

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Wall Street is becoming convinced the trade war is here to stay and will only get worse

Presidents Donald Trump and Xi Jinping.

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As stocks plunged Thursday, Wall Street inboxes were filled to the brim with predictions that the White House would go full throttle and slap tariffs on all Chinese goods, in an escalating and prolonged trade war that could begin to hit consumers and slow global growth.

The Dow lost more than 400 points at its lows Thursday, as both the U.S. and China appeared to dig in to their positions. No talks are now scheduled, and China’s Ministry of Commerce Thursday warned the U.S. to act with “sincerity” and change its “wrong actions.”

A number of firms released new reports warning the trade war was getting worse including economists and strategists from Nomura, Goldman Sachs and Bank of America.

“I still think the risk is a full-blown trade war and it’s beginning to look increasingly like one,” said Ed Keon, chief investment strategist at QMA.

Energy led the market lower, but tech names were hit hard, with the S&P technology sector losing more than 3.3%. Tech names are in the cross hairs of the trade war as the U.S. also seeks to thwart Chinese acquisition of U.S. intellectual property. It has also blacklisted China telecom firm Huawei, preventing it from buying U.S. components. The VanEck Vector Semiconductor ETF SMH was down 2.5%, and is now down nearly 15% for the month of May.

Moving into cash

Keon said if the trade war escalates, it could push the stock market into a correction of as much as 10% or more. He has moved more assets into cash and has a larger position in Treasury futures, as he awaits a more certain outcome.

The U.S. moved forward May 10 with raising tariffs on $200 billion in Chinese goods to 25% from 10%, and President Donald Trump has said there could be tariffs on the roughly $300 billion in Chinese exports that do not yet have tariffs. Many of those goods go directly to consumers.

“We now think it is more likely than not that the Trump administration will move ahead with the final tranche of tariffs targeting roughly $300bn in imports from China at a 25% rate. Our baseline scenario assumes that the new tariffs go into effect at some point before end-2019, most likely in Q3 after a meeting between Presidents Trump and Xi at the G-20 in late June,” wrote Nomura chief U.S. economist Lewis Alexander.

Alexander said there could be a short-term truce following the G-20 meeting, talks could breakdown later in the year, resulting in more tariffs. “Without a clear way forward during an intensifying 2020 US presidential election, we see a rising risk that tariffs will remain in effect through end-2020,” he wrote.

Bank of America fixed income strategists, in a note, said the trade war is turning out to be worse than they expected. They sliced their forecast for the 10-year Treasury yield to 2.6% at year end, from a previous 3% based on trade war impacts and the easier policy of global central bankers, who are responding to slower growth, low inflation and concerns about financial conditions. The U.S. 10-year yield sank to 2.30% Thursday, the lowest level since November, 2017. Yields move opposite price.

“Following the latest tariff developments, our year ahead numbers imply a best case scenario for a resolution of the US-China trade dispute, which seems unrealistic. We cut our forecasts,” the Bank of America strategists wrote.

Goldman’s view

Over at Goldman Sachs, economists late Wednesday say they are still hoping for a trade deal, but if there is no deal, the hit to the U.S. and Chinese economies would be greater and inflation would rise.

“While we still think an agreement is more likely than not, it has become a close call and without additional signs of progress over the next few weeks, implementation of the next round of tariffs on $300 billion of imports from China could easily become the base case,” wrote Goldman Sachs economists.

The economists estimates that a further trade war escalation with an across-the-board 25% tariff on all imports from China would boost US core PCE inflation by 0.6 percentage points, compared with a 0.2 percentage point boost now.

“Our model says that an across-the-board 25% tariff on China with a limited amount of retaliation would hit US GDP by 0.5% and Chinese GDP by 0.8%, all over a three-year period,” the economists wrote.

The sell-off in stocks deepened Thursday, and bond prices rose as fresh data PMI data showed a slowdown in services and manufacturing activity in the U.S. and Europe. The U.S. PMI data showed the softest rise in new business since the series began in October 2009.

Keon said the views on Wall Street have been becoming more gloomy about the trade war, but he still believes the consensus expects a deal.

“At some point the fears will get fully reflected in the consensus, and at that point, the selling will have run its course. I still think there’s a fair amount of complacency about the possibility that something will get worked out, and both sides will pull back from the brink,” Keon said. “If it doesn’t get worked out, the market has more downside.”

CFRA analysts warned that the market may be too complacent about the trade talks. “The standstill began three weeks ago and discussions have ceased. There is an increasing chance for the situation to last longer and possibly escalate further,” the analysts wrote. They do not see a significant impact of the higher tariffs, now at 25% , if left in place for the balance of the year.

Second half earnings

But the firm does see downside risk to second half earnings outlooks, given the fact that the increase in tariffs to 25% from 10% on $200 billion Chinese went into affect after most companies reported first quarter earnings and gave their outlooks. They also noted that retailers like Walmart and Macy’s plan to pass along price increases to consumers, to protect their margins.

CFRA said it is cautious on the market now. “We continue to like equities but prefer exposure to defensive and more value-oriented sectors over their growth counterparts right now,” the analysts wrote.

Keon said there are collateral risks as the U.S. and China find new outlets for their battle.

“It’s morphing into a more complex multi-faceted trade war,” he said, adding China could decide to make it difficult for the U.S. to acquire the rare earth minerals it mines. Those minerals are used in electronic equipment, and China is the biggest supplier.

“Each side is looking for where they have pressure points that give them leverage. We have a complicated relationship together so both sides have pressure points,” he said.

Technology is the latest battleground with the Huawei move by the U.S., and there are rising concerns that China will take aim at Apple, either with a consumer boycott or some regulatory move.

“Given the pressure we’re putting on their tech companies, it will end up hurting ours as well, through the supply chain. It’s a complicated situation. Until we get some clarity, tech may well be negatively affected,” said Keon.

The International Monetary Fund warned Thursday weighed in on the trade war, saying that U.S. importers have borne the brunt of the tariffs.

“While the impact on global growth is relatively modest at this time, the latest escalation could significantly dent business and financial market sentiment, disrupt global supply chains, and jeopardize the projected recovery in global growth in 2019,” the IMF said. Tariffs on additional goods would hurt consumers in both the U.S. and China, it said.

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Boost Mobile founder would buy back if terms OK from Sprint-T-Mobile

Boost Mobile founder Peter Adderton said he might buy back the prepaid wireless company if Sprint divests the unit to merge with T-Mobile. But only if the merged company agreed to give Boost a good wholesale deal to sell its service to customers.

“What does that wholesale deal look like?” Adderton said on CNBC’s Squawk Alley on Thursday. “In order for Boost to be able to compete, it’s got to have a deal that allows it to do that.”

The Federal Communications Commission and other regulators “have to police” a deal to allow Boost to compete directly against T-Mobile’s MetroPCS and a combined Sprint-T-Mobile, Adderton said. The FCC this week said it would bless a merger between Sprint and T-Mobile after the companies said they were willing to divest Boost Mobile, a mobile virtual network operator that uses Sprint’s network and wireless spectrum to offer service to prepaid customers, who are often lower-income.

T-Mobile controls about 41% of the prepaid market through its ownership of MetroPCS, according to estimates from research firm MoffettNathanson. Sprint controls about 17% of the market. Given that level of market control, Adderton has to know that Boost could win as an independent company.

T-Mobile CEO John Legere (L) and Executive Director of Sprint Marcelo Claure pose for photographs before testifying to the House Judiciary Committee’s Antitrust, Commercial and Administrative Law Subcommittee in the Rayburn House Office Building on Capitol Hill March 12, 2019 in Washington, DC.

Chip Somodevilla | Getty Images

“They need to make sure that the new T-Mobile doesn’t do this just as a facade to get their merger through,” Adderton said. “Is this a remedy that’s going to work? The answer is yes but only if that wholesale deal and the new owners have the ability to compete directly against MetroPCS and the new T-Mobile.”

The Department of Justice hasn’t decided if divesting Boost will go far enough in addressing the potential competitive harms of a Sprint-T-Mobile merger. T-Mobile is the third-largest U.S. wireless provider, followed by Sprint. Both carriers trail Verizon and AT&T in total customers.

Adderton sold Boost in 2004 to Nextel, which was later acquired by Sprint. Adderton is the largest shareholder of Boost Mobile in Australia, where it operates as a separate company. He said earlier this week that he wants Boost to be a “truly global brand” and called it “unfinished business” to unite the brands. He declined to offer specifics around the nature of his discussions with Sprint and T-Mobile on a potential acquisition.

Adderton said he believed a Sprint-T-Mobile merger “has to happen purely because I don’t think Sprint is in the financial state” necessary to compete.

WATCH: DOJ in active talks with T-Mobile and Sprint

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