Is Trump truly winning the trade war?

6 August, 2018

Escalating trade tensions between the U.S. and China remain the financial markets’ hottest topic.  President Trump seems to be celebrating winning the first battle of this war, saying that “tariffs are working big time” in a Tweet on Sunday. He believes that they will enable the U.S. to start reducing the large amount of debt accumulated throughout Obama’s administration. Trump also cited that the steep fall in Chinese equities as evidence that tariffs are working. In his opinion, they will make the U.S. much richer than it currently is and that “only fools would disagree”.

The tariffs so far are approximately on $85 billion of imported goods. Assuming a 25% tariff, it would raise $21.25 billion. This number represents 1.33 % of the $1.6 trillion in additional debt President Trump has accumulated since taking office in 2017 and only 0.1% of the current $21 trillion in total debt. So, it doesn’t seem the imposed tariffs would reduce the American debt substantially.

In my opinion, a large portion of the tariffs will be paid by U.S. consumers and I also expect CPI figures to begin reflecting these higher prices, especially if Trump’s administration imposes additional tariffs on $200 billion of Chinese goods. Rising inflation leads to higher U.S. interest rates, translating into higher cost of borrowing and debt servicing. Several U.S. companies have cut their profit forecast as a result of these tariffs, especially car makers; shares of GM, Ford, and Fiat Chrysler fell sharply after announcing their results. Other U.S. companies affected by Trump’s global trade war include Tyson Foods, Harley Davidson, United Technologies, Caterpillar and Coca-Cola, among several others.

This explains why the S&P 500 failed to reach a new record high, despite 81% of companies so far managing to beat their profit forecast in one of the best earning seasons in history. Given that we’re almost at the end of earning season, trade wars will return to dominate the headlines. The next big risk is likely to be the U.S. midterm elections in November. I think there’s a high chance that the Democratic Party will take over the U.S. Congress and end the Republican single-party control. This won’t be good news for equities, and I expect to see rotation to non-cyclical stocks and an increase of cash in investors’ portfolios.


Source link  
Market mood brightened

The gloomy mood across financial markets instantly brightened after the US Trade administration (USTR) announced that it will remove...

Key data to confirm a global slowdown

After a roller-coaster ride in global financial markets last week, investors will have a new daily routine going forward...

Asian stocks limp towards the weekend

Asian stocks are mixed despite the stronger close for US equities, as markets limp towards the weekend. The recent flare-up in US-China...


Rate cuts not a cure to all problems

After a 2% slide in US equities early Wednesday, the S&P 500 managed to erase all losses and end up 0.1% higher. Such market reversals have been...

Gold blasts above $1500

Gold leapt more than 1.5% to a fresh six-year high on Wednesday after three central banks cut interest rates in the face of slowing...

Markets portray semblance of calm

Following the selloff at the onset of the week, US equities rebounded while Asian equities saw a mixed start to the day. The Dollar index (DXY)...


Clear risk-off signal from US-China clash of wills

The selloff from risk assets continues today, with Asian equities extending this week's declines, after the S&P 500 posted...

Heading from trade war to currency war?

Investors in Asia woke up on Monday to a sea of red in equity and currency markets. Japan and South Korea's stock indices fell more than 2%...

Dollar surges to new 2-year high

Asian stocks are taking their cues from the selloff on Wall Street, as the Federal Reserve confused investors with its policy outlook despite fulfilling...

  


Share it on:   or