Global equity markets sold off sharply this week as trade tensions quickly escalated between the U.S. and China. All of this unfolded after it appeared China reneged on an important aspect of the trade deal in which they would change some of their local laws. This drove President Trump to threaten additional tariffs on grounds China was backing out of its promises and dragging its feet. Those threats then became reality on Friday when the U.S. increased tariffs from 10% to 25% on $200 billion in Chinese goods. Negotiations between U.S. and Chinese officials concluded Friday without a deal. The events drove a flight to safety with both gold and bonds ending the week higher.
S&P 500: 2,881 (-2.2%)
FTSE All-World ex-US (VEU): (-3.0%)
US 10 Year Treasury Yield: 2.47% (-0.06%)
Gold: $1,286 (+0.5%)
USD/EUR: $1.123 (+0.3%)
- Monday – Trade tensions flared following tweets from President Trump that he will impose additional tariffs on China.
- Tuesday – Despite threats of additional tariffs, China agreed to continue trade negotiations in Washington.
- Wednesday – Iran said it will end certain commitments of the 2015 nuclear deal.
- Wednesday – The House judiciary committee voted to hold Attorney General William Barr in contempt over the Mueller report.
- Thursday – Uber announced it would set its IPO price at $45 a share, which put its valuation at the low end of expectations.
- Friday – Uber stock began trading on the NYSE, declining on its first day in what is being called a disappointing debut.
- Friday – The U.S. increased tariffs on China from 10% to 25% on $200 billion in goods.
There was only one thing on investors’ minds this week: the US-China trade dispute. And what a ride it’s been. It was only last weekend when markets had mostly written this off as a non-issue and assumed a deal was in the bag. But a few tweets later from President Trump and all that changed. Sure enough, as of Friday, Mr. Trump made good on his threats to raise tariffs on China to 25%. China has vowed to retaliate, but it is still unclear what actions they plan to take.
Up until this week everything seemed to be going well, and this perception helped drive much of this year’s stock market rally. But it’s now clear the trade negotiations were more fragile than most expected. That reinjects a degree uncertainty, which is why we’re seeing this resurgence in market volatility.
The good news, at least for now, is that China remains willing to talk. And in our opinion there are a few possible outcomes. The first is that both sides are unable to come to an agreement and negotiations are completely broken off. If that results in expanded 25% tariffs with no end in sight, it would most likely lead to much steeper market declines and a very real drag on global growth. There is a meaningful difference between 10% and 25% tariffs in terms of making business decisions regarding trade partners and supply chains.
The second, and in our opinion still more likely outcome, is that a deal is reached in the coming weeks. President Trump doesn’t want a massive drawn out trade war right before an election year. In such a scenario, the longer term impact on markets will largely be dictated by the nature of the deal. If it comes across as more permanent and lasting, it would likely be cheered by markets. But if it seems only temporary, which in turn could lead to more disputes down the road, it would likely fuel additional bouts of volatility.
Yesterday, JP Morgan CEO Jamie Dimon put the odds of a deal at 80%. He doesn’t have a crystal ball either, but his guess is as good as anyone’s. Those odds may have dipped somewhat today but the bottom line is both outcomes are possible.