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Market (Over)Reaction To Huawei's CFO Arrest

Summary

Huawei CFO arrested in Canada.

World stock exchanges shrink.

Overreaction of news.

The Huawei CFO Meng Wanzhou is currently under arrest in Canada after she was arrested in Vancouver on Saturday. Meng, who is also the daughter of Huawei’s founder, is facing extradition to the U.S. as a result of Huawei's violations to U.S. sanctions against Iran. 

While this news is reasonably supposed to be negative for Huawei, as of Thursday morning it is considered by most financial press the driver of Asian and European stock price declines (SP500 futures are also down by 1%). Interestingly, price declines regard also firms that have nothing to do with tech companies. 

While financial press is always seeking to find rational explanations to stock price movements, the link between news and market trends has been downsized by several academics. Robert Shiller, Nobel laureate and author of the best seller Irrational Exuberance dedicates a full chapter on this topic. Therefore, the real question is: Is the Huawei-related news behind stock price declines? Or rather other factors such as i) a full-blown mature expansion phase, ii) the 90 days countdown to find a relief to trade war between China and U.S. iii) the tightening of monetary policy by the FED.

These macroeconomic circumstances, together with stock prices that move on multiples of P/E since basically 10 years may be the reason why market's volatility is extremely sensitive to news that can be sometimes considered irrelevant. For sure, trading in this environment requires tick skin and substantial cold blood. 

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.