This week served as a fresh reminder to financial markets that trade tariffs remain at the forefront of risks to global economies. Financial markets continued to swing as investors digest US President Donald Trump’s tweets ahead of the December 15 trade deadline.
Sensitivity to trade war developments resurfaced last Monday as investors negatively reacted to US President Trump’s willingness to use tariffs as a negotiating tool. The US President threatened to impose 100 per cent tariffs on up to $2.4 billion of French products.
This came as a reaction to a digital services tax imposed by the French government which the US deemed as unfairly discriminating against US technology companies. US President Trump also declared that the US will restore tariffs on metals from Argentina and Brazil, in retaliation to the countries manipulating their exchange rates. The new tariffs will protect US manufacturers and farmers.
Right on cue, US manufacturing data came in weaker than expected. The ISM Manufacturing PMI recorded a deeper contraction at 48, as global trade tensions continued to weigh down on economic data.
On the US China trade war saga, optimism was initially damped as President Trump’s downplayed the urgency for a deal with China with a tweet stating that he could wait until after the 2020 election to sign a deal. However, equity markets took a positive turn on Wednesday, as indices halted a three-day decline following reports that China and the US could be in fact closer to a trade deal.
The increase in near term uncertainty is significant as investors repriced their expectations ahead of December 15 trade deadline, on which an additional 15 per cent tariff will take effect on approximately $150 billion worth of Chinese imports, unless there is material progress in trade negotiations. As a consequence, this date has been viewed as a gauge for the progress in the trade negotiations between the US and China.
More importantly, this round of tariffs is viewed more negatively as the additional tariffs would mainly affect the cost of consumer products, including clothing and consumer electronics. If the tariff is implemented, the cost of importing such products increases and retailers would be forced to pass on the higher costs on to the consumer. Such tariffs are therefore more likely to materialise into higher prices for the US consumers and impact consumer spending.
The recent market volatility, mainly driven by President Trump’s tweets, signals how sensitive markets remain not only to the trade dispute between the US and China, but also with other trading partners.
Despite the perception of progress in the trade war negotiation, investors should still be aware not only of the potential disappointment in reaching a resolution but simply because there is no long term winner. As this political dispute drags on, economic data points to the negative effect higher trade tariffs have on the manufacturing industry and now potentially the consumer. Ultimately, how the equity market will react mainly reflects expectations for economic and earnings growth in the next few quarters.
Disclaimer: This article was issued by Rachel Meilak, CFA equity analyst at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.