Investors start the week with fresh concerns over escalating trade tensions between the U.S. and China.
The U.S. stock market is again trading lower, down roughly -6% in the past 30-days.
On Friday China announced new tariffs on U.S. goods and the U.S. has followed suit by hiking existing tariffs on Chinese goods. President Trump said the U.S. will raise existing tariffs on $250 billion worth of Chinese goods to 30% from 25% in October. He also raised tariffs from 10% to 15% on another $300 billion of Chinese goods. Some of those tariffs will start on Sept. 1 while others have been delayed until Dec. 15.
China said on Saturday that it strongly opposes Trump’s decision to levy additional tariffs on $550 billion worth of Chinese goods, and warned the U.S. of consequences if it does not end its ‘wrong actions’. President Trump also urged U.S. companies to move their operations out of China which analysts say has spooked Wall Street as its not clear if the President intends to pursue official action on that front.
Understandably, investors and analysts alike are concerned that the tit-for-tat between China and the U.S. could balloon into an overarching global financial slowdown.
There is no denying the U.S. economy remains strong but there are signs that domestic growth is slowing, which could make the U.S. more vulnerable to external shocks. One potential shock on the radar is the economic slowdown in Asia which is being exacerbated by the U.S.-China trade dispute.
A longer drawn out trade war is also seen crimping U.S. corporate profits and business investment which could in turn deliver a blow to the U.S. labor market if companies begin laying people off. Investors will get some insights into the U.S. manufacturing sector today with the release of Durable Goods and the Dallas Fed Manufacturing Survey. Below are more details on some of the top concerns that investors are facing this week.
Trade: Starting with the positive news, President Trump and Japan’s Prime Minister Shinzo Abe say they have agreed on the principles of a trade deal that they expect will be signed next month.
Trump’s Trade Representative Robert Lighthizer said the deal would open up markets to over $7 billion worth of goods and covered agriculture, industrial profits and digital trade. Trump also seems to have made inroads with the UK, with British Prime Minister Boris Johnson on Sunday saying he and President Donald Trump were “gung-ho” about a post-Brexit trade deal, which they reportedly have discussed on the sidelines of the G7 conference. At the same time, Johnson apparently warned Trump that his trade war with China was “not the way to proceed,” and risked pushing the global economy into a downturn. On the China front, analysts widely expect the September 1st tariffs will soon begin to impact U.S. consumers, with Bank of America Merrill Lynch’s Joseph Song warning that U.S. economic growth “is going to start to slow below trend at the turn of the year.”
Central Bank Policy: Many investors and analysts are looking to the U.S. Federal Reserve for help in easing the fallout from the trade war. Federal Reserve Chairman Jerome Powell signaled Friday that the central bank will cut interest rates again as soon as next month. “Based on our assessment of the implications of these developments, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2% objective,” he said at the Fed’s annual Jackson Hole symposium. He also noted that global economic turmoil has intensified since the Fed lowered its key interest rate back in July. Fed fund futures markets and many economists expect two more quarter-point rate cuts this year. The next Fed policy meeting is September 17-18.
EU Politics: Jerome Powell in his speech at the Jackson Hole symposium cited the growing possibility of a “hard Brexit,” and “the dissolution of the Italian government,” as concerns that could threaten the global economy. British Prime Minister Boris Johnson still has not struck a deal with the EU and said on the sidelines of the G7 conference that “the important thing is to get ready to come out without a deal.” Britain is scheduled to leave the eurozone on October 31 and analysts worry a “no deal” exit could send shockwaves through the global economy. In Italy, the government has yet again collapsed with the Prime Minister forced to resign last Tuesday. If the major political parties do not form a new governing coalition and appoint a new Prime Minister by Tuesday, they risk triggering early elections. Without a government in place, Italy can not pass a budget, which needs to be submitted to the EU for approval this fall. Without an approved budget, Italy faces harsh VAT tax hikes that could further weaken the economy. Italy is the Eurozone’s third-largest economy and also one of the most indebted. If Italy goes under, it could prompt another major financial crisis in Europe, in turn triggering global financial panic.
Hong Kong Protests: There are concerns that the unrest in Hong Kong could negatively impact chances of a U.S.-China trade deal if China feels the U.S. is supporting the protestors. Over the weekend, American flags were seen being waved by some protestors in what they say is an effort to solicit U.S. support to “guard our rights.” Analysts worry this will feed into Chinese propaganda that is trying to blame the CIA and other U.S. “instigators” for the unrest. The White House has mostly tried to steer clear of the conflict, though over the weekend Trump did send a warning to China that he would have a hard time doing a trade deal if Hong Kong turned into “another Tiananmen.” Last week, an op-ed piece in the Wall Street Journal by Senate Majority Leader Mitch McConnell blamed the protests on Chinese oppression and called on China’s trading partners “to make it clear that any crackdown would have real and painful costs.”
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