US stock indices closed in positive territory on Tuesday (S&P 500 + 0.58%, DOW + 0.35%), with traders focusing on the corporate earnings report to be released on Friday. Futures are traded in negative territory today with Asian indices having erased some gains as well. ShCOMP returns to support at 2700 points, while the Japanese Nikkei and KOSPI declined in the Asian session.
The reason for all this movement remains the same – trade wars.
The US Trade Ministry released a new list of $200 billion goods, which may be hit by 10 percent tariffs. This was the result of China’s reluctance to enter negotiations with the US, as was hinted by the White House official in an interview with CNBC.
According to US Trade Representative, Robert Lightnizer, the Trump Administration has been asking China to open the market, conduct fair trade and honor the principles of fair competition for more than a year. However, instead of paying attention to the issues raised, China embarked on the path of retaliation, introducing reciprocal tariffs. According to Lightnizer, there is no justification for such actions.
It is likely that in the short term, this conflict will continue to escalate. Nevertheless, the dollar is in positive territory, with futures on the S&P 500 losing just 1 percent. The commodity markets are also in the red zone with oil, and precious metals dropping, but it’s not only tariffs than weighs on them. This is likely the market’s response to a huge list of goods, while the Chinese Foreign Ministry plans to include non-tariff barriers in the battle, since China imports less from the US (about 130 billion), so it will not be able to retaliate dollar-by-dollar in tariffs. An increase in the existing 25 percent tariffs can seriously hurt some companies, which are barely afloat. Most likely, non-tariff measures will include a “silent struggle” in the form of deteriorating business conditions for US companies in China, agitating boycotts on the part of consumers, and various bureaucratic delays.
“If the United States loses its sense of measure and publishes such a list, China will respond with quantitative and qualitative measures,” the Chinese Ministry of Commerce reported.
Inflation in the US is getting more expensive due to the aftermath of the trade war, but this is just part of the aftermath. Even now, it’s clear that some US firms operating in China will see their corporate margin declining. Trump adds tariffs here to make the business in China seem even less sweet, and force companies to return to the US. But such a turn seems unlikely. Since the beginning of the protectionism of Trump, only a few companies have carried out “symbolic” actions to transfer the capacities in the US. Meanwhile, there are news of the transfer of production from the US, and not vice versa (the same Harley-Davidson)
A small concern is evident on Treasury bonds, the yield on 10-year securities fell by 1 percent, but this is also not at all what can be expected from the trade war between the two leading economies.
It is important to emphasize that the publication of the tariff list does not imply an obligation to introduce them. Release of the document increases the likelihood of their introduction, but not their enforcement. As such, one could hope that these threats will not come into effect. However, the period of threats and escalation will last until August 30, until then, the list may be revised, taking into account the companies’ requests for exclusion from the list.
Usually as it happens when everyone talks about collapse and correction, they do not happen. Now the same situation is observed in the US. Take, for example, the flattening yield curve as a sign of a recession. Is it a self-fulfilling prophecy? If they believe that the signal works, then it can because it is widely believed in and followed. Now, after the announcement of tariffs, we can concentrate entirely on playing out the US macroeconomic statistics and earnings data. We will certainly get some signals from the corporate data about firms’ response to the tariffs which will indicate their true effect. And the first in line is the CPI on Thursday, which is expected to show moderate growth in line with some cooling on the employment front. Therefore, the growth of the dollar could be limited and its growth could be related to the countries standing between the US and China which may suffer more from consequences of the tariffs, and as such their currencies should be sold. The euro was disappointing yesterday by the significant deterioration in the indicators of ZEW (optimism in the corporate environment), which was caused by the fragile position of European business in the global chain. However, the Euro has the room to grow the inflation data disappoints in the US.
Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.