How have the financial markets reacted to President Trump’s threat of higher tariffs?
Following the uncertainty and concerns raised by trade talks between China and the US, investors turned to less volatile government bonds as Asian equities plummeted on Wednesday, May 8th, 2019.
On Tuesday, May 7th, 2019, China confirmed Vice Premier Liu He’s scheduled Washington stopover for trade negotiations on the 9th and 10th of May, would go ahead as planned despite President Trump’s threat to increase tariffs by a further 15 percent by the end of the week.
Euro Stoxx 50 futures fell by 0.09 percent, FTSE futures fell by 0.03 percent whereas German DAX futures rose by 0.05 percent. The SSE Composite Index dropped by 0.1 percent. The Korea Composite Stock Price Index dropped by 0.3 percent, Australian stocks fell by 0.4 percent and the Nikkei 225 declined by almost 2 percent.
Goldman Sachs strategists said:
“The stock market had held an optimistic view towards U.S.-China trade, likely pricing in an end to negotiations. But the sudden resurgence in trade tensions has forced it to grapple with uncertainties, such as the risk of the talks taking an unforeseen turn.”
Taken from The New York Times.
On May 7th the stocks on Wall Street declined, as both the Dow Jones Industrial Average and S&P 500 fell by just under 2 percent because of growing concerns around the US-China trade dispute.
The global stock markets were sent tumbling this week because of the US’s claims that China had started to backtrack on its trade commitments. President Trump then threw a spanner in the works with his startling threat to increase tariffs on Chinese imports from 10 to 25 percent.
“From an equity market perspective, the immediate focus is on the two-day talks scheduled to take place between the U.S. and Chinese officials,” said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui DS Asset Management. “However, it is difficult to imagine the two parties resolving their differences in just two days of talks. The markets may have to begin pricing in the trade conflict as a long-term factor once again.”
Taken from Reuters.com.
With investor sentiment taking a negative perspective on the financial markets, the price of government yields dropped.
With regards to the forex markets, the USD fell slightly whereas the euro rose somewhat coming in at 1.1204 USD. A 0.2 percent drop was seen in the New Zealand dollar following a 0.20 percent decline in New Zealand interest rates.
The price of crude oil declined as the latest threats and drama enveloping the China-US trade war sparked wide investor concern regarding the future of global economic growth. An increase of 0.54 percent was seen in Brent crude oil futures.
What should investors have in mind when it comes to the financial markets and the US-China trade war?
The stock markets continue to decline as concerns and uncertainties are amplified by the latest threat of increased tariff rates made by US President Donald Trump. The chief US equity strategist for Goldman Sachs, David Kostin suggests:
“We are thinking about some of the drivers of profit growth going forward, and we are looking at some of the communication services stocks. We like a combination of low labor cost sensitivity as a way of inoculating against rising labor inflation… The second would be dividend growers as a long-term strategy. That’s idiosyncratically what I would focus on. As a portfolio manager, focus more on domestically facing companies whose revenues are more domestically sourced, more services oriented in particular, versus on the goods side of the economy. 70% of the revenues of U.S. companies are domestic, so while tariff is an issue, it’s concentrated in some industries and some sectors than others.”
Taken from CNBC.com.
What does the European Commission have to say about the trade war?
Following a pessimistic revision of its economic growth forecast for 2019, the European Commission has cautioned that the growing uncertainty surrounding the US-China trade war could wreak havoc on the Eurozone economy. The EC (European Commission) claimed that the deceleration of international trade had hindered expansion across Europe. The EC slashed its forecasted GDP growth figure by 0.5 percent from 1.9 percent to 1.4 percent.
With further trade negotiations between China and the US scheduled for this week, the European Commission cautioned that a further increase in tariffs could spark a “major shock” in the bloc’s economy.
Additionally, uncertainty caused by the ongoing Brexit process and whether the UK will leave the EU with or without a deal has diminished economic growth.
The European Commission’s warning followed President Trump’s tweet in which he threatened to increase tariffs by a further 15 percent on more than 500 billion dollars’ worth of Chinese imports as trade negotiations are not showing signs of reaching a conclusion.
“Trade war fears are particularly toxic for industrial and technology stocks. Boeing ended the day down 3.8%, United Technologies lost 3.4%, Apple fell by 2.7% and Home Depot dropped by 2.4%.”
Taken from theguardian.com.
The IMF’s (International Monetary Fund) Managing Director, Christine Lagarde, said:
“For us at the IMF, it’s imperative that trade tensions are resolved in a way satisfying for everyone because clearly tensions between the United States and China are the threat to the global economy.”
Taken from The Guardian.
The gloomy economic forecast made by the European Commission demonstrates the poor and failing performance of individual countries. For example, the Italian economy is expected to grow by a percentage of 0.1 while the budget deficit is forecast to increase by 1 percent of GDP next year.
Similarly, German economic growth dropped by 1.3 percent after weakening demands for German automobiles, Germany’s main export, took its toll on the economy.
Yahoo Finance suggests that Momo Inc and Weibo Corp could be impacted should the trade war between China and the US continue.
“In terms of Chinese companies, Momo Inc (NASDAQ:MOMO) and Weibo Corp (NASDAQ:WB) are in the spotlight because they are both somewhat dependent on the growth of the Chinese economy. Both are social media platforms, with Momo being known for its live video streaming and Weibo known for being the Chinese Twitter. If the Chinese economy slows due to the continued trade war, Weibo’s ad sales might not be as strong as it could be and Momo’s paying users might not grow as fast. According to our data, Momo Inc (NASDAQ:MOMO) was in 21 top funds’ portfolios at the end of December. Ken Fisher’s Fisher Asset Management increased its stake by 58% in the first quarter to 4.366 million shares at the end of March.”
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