Fitch noted that Trump’s trade wars could cost the world $2 trillion in global trade, its chief economist, Brian Coulton noting that “the U.S. investigation into auto tariffs, possible additional U.S. tariffs on Chinese imports, and the likely reactions of other countries and blocs, point to a potential serious escalation, albeit with an impact that falls short of across-the-board tariffs imposed on all major trade flows.” Additionally, he expects the cycle of tariffs to shed 0.5% from total U.S. growth, with a shock of 35%-45% in U.S. import prices. Additional effects, Coulton notes, would include lower real wages given the higher price of imports and ultimately, a lower rate of hiring, given the dent in the multiplier effect.
In essence, all of this comes to accentuate how much damage could be afflicted by our trading war, one that seems to have no end in sight. The octave rising higher and higher, the stakes have grown for backing off, and like any game theory experiment, we’re seeing countries refusing to compromise because of the reputational effects it brings in tow, meaning that we’re really heading to a negative sum result, especially in the short-run.
With that said, it’s become harder and harder to go long in this market. On the investment side, even though the common wisdom is to never try to time the market (just look at how much the S&P 500 has risen in the last 50 years), the knee-jerk response is to hold off from buying in when things aren’t looking pretty, when there are so many negative catalysts at play. And more than anything, that’s what a trade war is all about, the agenda of each country being to make it as bad as possible for its counterparts threatening its wellbeing, meaning that if everything continues like it has until now, things could get worse – and fast! In the short-run, retaliatory tariffs let a country pound its chest; but, shortly thereafter, the trade partner subject to the tariffs strikes back, meaning that goods are increasingly produced by the countries least efficient in producing them. The entire Ricardian Model called into question, it becomes not the most comparatively efficient companies producing goods, but rather, the ones with the most muscle, clout and ability to subvert other countries leveraging their productivity.
Another factor clamping growth is the rise in oil prices. West Texas Intermediate crude has risen to a new three-and-a-half year high. Even though Trump has tried to get Saudi Arabia to ramp up production, prices at the fill-up station on July 4th were the highest they’ve been in 4 years. Some analysts project prices to creep up, something also seen as a factor in mid-term elections, which is why Trump asked Saudi Arabia to intervene. With the sanctions on Iran, Venezuela suffering a huge downtick of its own, there’s a lot of uncertainty in whether producers can meet Americans’ needs at the peak driving season. Given the abundance of gas guzzling cars in the American market, these developments could have far-reaching consequences not only for the elections but also for consumer confidence, inflation, and rate hikes. Andrew Lipow, president of Lipow Oil Associates, shared a forecast of his own, “If WTI went to $85 tomorrow, you would expect gasoline prices would rise 25 cents a gallon.”
U.S. stock futures moved up yesterday in the holiday-shortened session; global market losses, though, could gnaw away at American indexes’ ability to retain those gains. With that said, the Financial Times reported that the EU may try to broker an international deal to thwart the damage caused by U.S. auto tariffs. The EU may seek a “plurilateral” deal, involving itself, Japan, South Korea and the U.S. The deal would not involve the entire WTO, a body Trump has essentially threatened to exit, in an attempt to avoid an all-out, world-encompassing trade war.
Market Summary: The Dow ended off 0.5%. The S&P 500 also shed 0.5%, the tech sector trading off 1.4%. The tech-leaning NASDAQ fell 0.9%. In Tuesday’s movement, losses picked up towards the end of the session.
Techs took a spill after Micron (MU) was suddenly and temporarily blocked from marketing part of its memory chip roster in China. Other sector companies fell. Consumer discretionary stocks traded off 0.6%, financials dipping a full 1%. By the same token, analysts inferred that the drop in tech and financial stocks may not be of such great weight, given the low volumes in Tuesday’s trading. Uncertainty is still rampant, $50 billion in U.S. tariffs set to go into effect on Friday, China threatening to set its tariffs into motion at the same hour.
One bright spot: RBC Global Asset Management equity trading chief, Ryan Larson, noted: “Broadly speaking, markets are getting a bit more concerned about trade, though as has been the case over the past six months, tough rhetoric is almost always followed by softer solutions.”
Last but not least, there seems to be a glimmer of hope. According to a report by a German newspaper, Handelsblatt, the U.S. has expressed a willingness to waive tariffs on European cars if Europe eliminates all tariffs on U.S. cars. The “zero solution” prospect sent the Stoxx Europe 600 Autos and Parts Index up by 3.1%. We could see a spillover today into U.S. markets, so be primed for lively movement.
Hot Stocks: MU, XOM, GM, F, CVX
Have a great trading day!