President Trump's recent announcements on tariffs should have created a threat to the US Stock market logic tells us as well as to the other nations that are involved in this trade war.
Let's not forget Canada, Mexico, and Australia are already exempted. Plus the announced tariffs cover hardly any US trade as the Goldman Sachs image below shows.
So why was there all this panic? The markets didn't crash. Go out and look at them. The reason for it being in the headlines was that it goes against decades of tariff reduction as evidenced by the image below:
"Investors can still hold their breath and feel little relaxed because the President is not in a mood to begin massive trade war on international grounds. But it doesn't mean that this new tariff plan will not leave any impact on US Stocks. It seems like genie has now come out of the bottle and the reverberations of US market will showcase tariff terror for several months and even years ahead."
The time when President Trump tweeted his statement that trade wars are good , world stock market reflected an immediate response towards it. It is now, with China involved we have seen headlines such as " Asian shares slump on fears of a trade war between the US, China " and " Wall Street nosedives as investors flee on trade war fears "
Although the US stocks managed to rise slowly after President's tweet if we look at the broader spectrum, the confusion initiated with the fear of trade war will leave the higher burden on the shoulders of investors. It doesn't take a genius to work out there is confusion when there is uncertainty. I appeal to your logic for my source.
The ultimate impact of this confusion will be observed for several months ahead on the US economic performance. I f the 25% tariff on steel gets materialized with impact to President Trump's actions, one may reasonably argue that the US stocks are expected to suffer . The red states will lose more with this trade war as conjectured by Goldman Sachs in the table below. European politicos knew that if they target domestic markets that are populated by Republicans, it will be much easier to force President's focus on this issue.
The tariff plan that is recently proposed by Trump was actually unexpected in the market and it seems fundamentally illogical as well. It drew sharp rebukes from the leaders of Republican Party. However, we cannot say that trade war is materialized but investors must keep on expecting some changes in the plan same as President does with most of his proposed initiatives in early days. If we have a look on the other popular political negotiations from President Trump in last few months, such as the attempt to repeal the Affordable Care Act or Immigration deal on DACA; it is expected that the dead horse of the trade war will affect the headlines for several weeks ahead.
Right after President Trump's tariff related announcement, the experts are now trying to determine the health of US Stock market for the coming future. They have some expectations from the halls of Congress that can act opposite to the White House. In case if the Republican legislators such as Senate Majority leader Mitch McConnel and House Speaker Paul Ryan somehow force President Trump to control the trade war, investors can feel little relaxed. Some experts say that if GOP fails to grab the bait that is currently being offered by American Trading Partners, there are chances that president will push his lunacy with a certain degree of success.
Impact of announced tariff changes has shown a great impact on almost all sectors of US market. The US car dealers say that auto sales have much flattened within past few months and the manufacturers are not ready to absorb this sharp shift in the cost of trucks and cars in America. This burden will be further passed to the consumers in America. Note that almost 2 million jobs in America depend upon on Beer Industry. There are chances that people will face major job loss with current tariff change.
Goldman Sachs sees four scenarios . Their quote below and the images explain it perfectly.
- US tariffs without retaliation. We round up the announced tariffs to 1% of total imports, partly because the Trump administration has already announced a few specific tariffs (e.g. on Canadian lumber) and partly because some further restrictions are likely even in a mild conflict scenario. We allow interest rate and the exchange rate to respond endogenously to the tariffs but assume that equity prices remain unchanged.
- A US-focused trade war. We assume that the US tariffs lead to retaliation from trading partners and further US tariff increases. In this scenario, we assume that tariffs on all trade to and from the US rose by 5pp. But we assume that trading partners do not put up tariffs between each other; for example, the EU and China both put up a tariff against US imports but do not erect trade barriers between each other.
- A global trade war. We assume that each country imposes a 5% tariff on everyone else. For example, the EU puts up a tariff against China in response to the US steel tariffs in an effort to prevent Chinese steel from flowing to Europe.
- A global trade war with a global equity sell-off. We assume that global equity markets drop by 10%, in addition to the global 5% tariff.
The US chamber was observed to show more concern towards this trade war and it is going to risk the economic momentum for a long run. Will any new tariffs harm American Manufacturers? If so will the impact be seen on larger grounds with potential trading partners?
Beyond this, there are few companies that are expecting huge returns from new tariffs such as the aluminum and steel producers in the United States. The CEOs of most big steel companies are invited to White House for a meeting with President Trump. Impact of all these fluctuations will be seen in the US Market after the month of March.
Alpesh B Patel(@alpeshbp) -Alpesh is a hedge fund manager and Author of Trading Online (Financial Times). He is a partner to 24option (FX Empire Best Educational Broker 2017) who offer CFD trading on forex, stocks, commodities, indices, and cryptocurrencies.
The content of this article constitutes Marketing Communication and does not qualify as Investment Advice or Investment Research. This article is produced by Alpesh Patel. Any views or opinions presented in this article are solely those of the author and do not necessarily represent those of 24option . The article is of a general nature and does not take into consideration individual readers' personal circumstances, investment experience, and current financial situation. 24option accepts no liability for the content of this article, or for the consequences of any actions taken on the basis of the information provided.
This article was originally posted on FX Empire
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