9 April 2020
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With stock markets looking vulnerable, could a compromising China send stocks sky high?

Will Trump's trade war give us a happy ending?

Peter Switzer
13 September 2018

Anyone trying to work out why our stock market is having difficulty going higher should think of three Ts — Trump, tariffs and trade war! The US President is trying to bring off his trifecta of trade deals after nailing the Europeans and the Mexicans with trade concessions, in the wake of his threats to nuke their products with tariffs.

But the Chinese are proving harder to nail. Right now, Donald has slammed $US50 billion worth of Chinese exports to the US with tariffs and the Chinese have returned fire. Donald has upped the ante, warning another $US200 billion worth of Chinese goods will cop a tariff but this play hasn’t been executed yet.

China only buys $129 billion worth of goods from the USA so they can’t do a tit-for-tat tariff slug on $US200 million worth of goods, so how they retaliate remains an uncertainty for stock players. And not knowing ‘stuff’ is bad for stock markets.

Making the whole possible trade war escalate is a recent threat from the President that he has another $US267 billion worth of Chinese goods that are earmarked for tariffs, if trade talks don’t progress as he would prefer.

In a twist on what you’d expect, the Chinese have called in the trade referee — the World Trade Organisation — to support their claim against the US for hitting their products with anti-dumping duties. The Chinese are asking for support to get $US7 billion worth of compensation for penalties that have been imposed on Chinese exporters since 2013!

This is a sideshow to draw attention to the fact that the USA is a trade bully and China is looking for world economy support because they know most countries don’t like the game Trump is playing.

As this all unfolds, news comes that the US has asked to restart trade talks with China. According to Dow Jones wires, Treasury Secretary Steve Mnuchin sent an invitation to Chinese officials, proposing a meeting in the next few weeks to discuss trade issues.

Those who have done the numbers argue that a trade war would hurt China more than the USA. The Shanghai stock market is down 20% since this trade war trash talk started in May but it’s the uncertainty of how China might retaliate that worries stock players.

And from our stock market’s point of view, we don’t really need our number one export customer — China — to be in a losing battle with the USA, as we supply a lot of the raw materials inside the ‘stuff’ they sell to the States. Interestingly, at a Switzer Listed Investment Company Conference that I’ve been hosting this week, all the experts on commodities who run related funds believe the outlook for commodity prices is positive.

This can only be right if there is no real trade war with China and I can’t believe that President Trump can afford to create a real trade war because it would lead to a huge sell off on Wall Street. And we all know when the New York Stock Exchange sneezes, world markets catch a cold.

A huge market slump before the mid-term elections could not be great for the Republicans and a bad result could leave Donald as a lame duck President, though he still would be able to keep hitting China and others with trade sanctions, as this power actually rests with the President!

Interestingly, Art Cashin, the director of floor operations at the NYSE for UBS, thinks the stock market is due for a pullback, citing Goldman Sach’s bear market risk indicator, which is at the highest level in a couple of decades. A trade war with China would be like throwing a match into a barrel of petrol for the stock market right now.

Against this concern, CNBC’s Jim Cramer noted that stocks with heavy exposure to China have been on a recent rise, which he thinks suggests a real trade war might become a lower risk. A stock like Honeywell, which sells a big proportion of its products into China, is up 7% over the past month.

Let’s hope this tells us a Trump trade happy ending is possible.

Peter Switzer's book Join the Rich Club is on sale for 30% off from the Switzer Store until the end of Easter. Click here to pick up a copy today!

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