Market and Tariff Uncertainty Still High after Pause in Trade War

High Uncertainty Continues to Spook Markets

Wall Street experienced a significant sell-off on Thursday, with the S&P 500 dropping 3.5% after a brief surge the previous day. Investors are concerned that President Trump’s tariffs could lead to a recession in the U.S., despite his recent pause on new tariffs for 90 days. The tech-heavy Nasdaq also fell sharply, and currency markets reacted with a decline in the dollar against other currencies. Concerns about the ongoing trade war with China persist, particularly as China imposes additional tariffs on U.S. goods. The uncertainty surrounding trade policies is expected to weigh heavily on consumer and business activity in the coming months.

We expect a recession in the US and in many global markets. This uncertainty will remain for at least the next three months and possibly longer. There are many unknowns still. For one, the EU might still retaliate against the US if negotiations falter with Trump. Brussels has hinted at possibly retaliating against services, which will certainly lead to further US retaliation. Our forecast is that a deal will be struck with the EU but it will take a while to finalize. The EU has offered zero-for-zero tariffs on industrial goods but the US did not accept this since it wants what it calls non-trade barriers such as VAT and product standards changed. This will not be easy but we think both sides will find an eventual compromise.

Some political analyst seem to think that the EU will align closer to China if a deal does not get agreed. We think that will not happen since China has pursued economic nationalist policies for years and its tariff wall and non-trade barriers are high. For the EU, the US is the much preferred option. Also, don’t forget that the EU is still dependent on the US for defense although this dependence will lessen over time as the US is placing more assets in Asia to deter China.

Smaller economies are likely to strike deals more quickly with the Trump administration. The big elephant in the room is what will happen with the US-China relationship. The risk is that it will not get resolved and that we are headed towards a decoupling scenario. It will not happen quickly and we expect at some point for the very high tariffs (Chinese tariffs at 80% + and US tariffs north of 145% +) that both countries have placed on each other to be lowered.

Thus, both China and the US will find a way to a lower tariff level but this will still be high compared to other countries. The Trump administration and President Xi of China are both facing domestic considerations that might make it difficult to show weakness and blink first. Thus, expect an event, perhaps a deal on the social media platform – TikTok.

Key Points

• Market Decline: S&P 500 fell 3.5%; Nasdaq Composite dropped 4.3%. This was after the huge gains made yesterday.
• Tariff Concerns: Trump’s tariffs may risk a U.S. recession; ongoing policy chaos affects market confidence.
• Currency Impact: The dollar weakened against other currencies; investors rushed to safer assets. The Chinese Yuan hit an 18-year low.
• China’s Response: China imposed additional tariffs, signaling unwillingness to escalate trade tensions but ready for dialogue possibly.
• Economic Uncertainty: High tariff rates on imports are expected to complicate business decisions and economic outlook.

Economic Indicators and Responses

The economic indicators suggest growing anxiety among consumers and businesses alike. With the potential for increased costs due to tariffs, many companies are reconsidering their pricing strategies and supply chain logistics. The manufacturing sector, which has already shown signs of contraction, may face further challenges as tariffs impact raw material costs and availability.

Corporate and Government Reactions

In response to these market pressures, several major corporations have begun to revise their forecasts. Companies in the technology and automotive sectors, particularly those heavily reliant on international trade, have expressed concerns about profitability in the face of rising costs. Some have already announced plans to shift production to countries with lower tariffs or are exploring alternative supply sources to mitigate potential losses.

China has put together a ‘National Team’ to help its state-owned enterprises (SOEs) weather the storm. It has also bought up the stock of companies in China and in Hong Kong to shore up stock market prices. This is the same playbook that China used during the stock market crash in China in 2015-16. The stock market support is part of a larger stimulus package that China is implementing in response to the trade war. Plus, Beijing told insurance companies and mutual fund firms to buy domestic Chinese stocks.

In addition, the Bank of England (BOE) decided to halt the sale of long-dated bonds of 10 and 30 year maturity due to the weak demand and sell off.

Conclusion

The unfolding trade situation continues to create volatility in the markets, with repercussions expected across various sectors of the economy. Until a clear resolution or strategy emerges from the ongoing negotiations, both investors and consumers will likely remain on edge, navigating through this uncertain economic landscape. As the situation develops, stakeholders are encouraged to stay informed and prepared for potential shifts in policy that could impact the market dynamics significantly.

Our view: it is still too early to commit lots of capital to this market. Investors should remain cautiously optimistic.  Expect further suprises to the downsides as the trade issues have not been resolved yet, especially between the US and China.  I would also add between the EU and China as well.