By Bill Curry
U.S. Targets $200 Billion More in Chinese Goods
The Trump administration on Tuesday said it would assess 10% tariffs on an additional $200 billion in Chinese goods, further deepening the trade rift with China. In all, that would be tariffs on $450 billion of Chinese goods—nearly all the $505 billion that China exports to the U.S. Although the new tariffs won’t take effect for at least two months, Asian markets responded negatively to the news on Wednesday, dropping more than in 1% in Hong Kong, China and Japan.
In retaliation for U.S. tariffs, China on Thursday guided the yuan to its largest one-day drop against the U.S. dollar in 18 months (although the yuan rebounded later that day). The yuan has now declined 2.3% against the dollar in 2018. While China doesn’t import enough U.S. goods to respond dollar for dollar in tariffs, Beijing is looking for other ways to punish the U.S., including delaying licensing for U.S. firms and slowing mergers and acquisitions.
Thus far, the U.S. Federal Reserve has assumed that tariffs have not been big enough to impact inflation. However, reports suggest that the latest round of tariffs against China could boost the consumer price index by as much as 0.6%, which would add an equivalent amount to the annual inflation rate. Perhaps Congress is also getting a bit uneasy with President Trump’s trade war: the U.S. Senate on Wednesday voted overwhelmingly to give Congress say on tariffs imposed on the basis of national security concerns. Although the vote was non-binding, it’s a sign that Congress might be poised to rein in the U.S. administration.
In Brexit-related news, the resignations of two Brexit hardliners have thrown Theresa May’s government – and the entire Brexit process – into turmoil. Britain is currently due to leave the EU in less than nine months.
North American Markets Rebound: Investors put aside trade concerns as markets in the U.S. and Canada climbed higher after a mid-week selloff. For the four days covered in this report, the Dow gained 468 points to close at 24,925, the S&P 500 rose 38 points to end at 2,798 and the Nasdaq added 136 points to settle at 7,824. In Canada, the TSX added 195 points over the period to close at 16,567.
On balance, we continue to recommend an overweight allocation to equities relative to fixed income: In a widely expected move, the U.S. imposed tariffs on US$34bn worth of Chinese imports on July 5th, and China responded immediately by introducing an equivalent 25% import tariff on US$34bn worth of American goods. Market reaction was muted. Subsequently, the U.S. announced plans to impose a 10% tariff on an incremental US$200bn of Chinese imports. The announcement, while consistent with earlier comments made by U.S. President Donald Trump, was met with a U.S. equity market sell-off on July 11th. Investors’ focus now shifts to the Q2/2018 reporting season, which could serve to bolster sentiment and serve as an equity market catalyst. We are mindful of and intend to closely monitor the risks posed by a potential escalation of global trade tensions. At this point, trade and other risks appear manageable, and we believe the economic backdrop supports our long-standing relative preference for equities.
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