Did Trump Spark an International Trade War?

After 3 days of losses, Friday’s gap down proved itself a beautiful buying opportunity for traders. The S&P 500, which over the course of Friday’s trading had fallen over 1%, succeeded in recovering, and was trading up 0.51% by the time of the closing bell. Friday’s intraday recovery proves that still, when there are buying opportunities, there are traders capitalizing. After all, the economy is still healthy and the earning figures of American firms continue to boast strength. At the same time, the index closed the week in the red at the 2,691 point level, beneath the critical 2,700 point level. In summary for the week: the Dow Jones recorded a drop of 3%, the S&P 500 slipping 2%. The NASDAQ fell 1.3%.

Trading on the stock market this past week was jittery. The testimony of Jerome Powell, which began last Tuesday, prompted a turn for the worse in markets, stocks struggling thereafter to hold their ground about the key 2,700 point level on the S&P 500. Powell’s congressional address wasn’t especially dour, but indexes had already traded at extreme buying levels from a technical vantage point, the address, therefore, serving as an easy trigger for automatic algorithmic trading programs.

On Thursday, it had seemed that indexes would be propped up by key support levels after the reverberations of Powell’s speech had subsided, the hope being that the very carefully followed 2,700 point level would hold its ground. But then, the bombshell came and word got round that Trump had plopped tariffs on steel and petroleum imports. There was nothing new about the development but the new tariffs faced sweeping resistance from members of the administration and members of Trump’s own party. The new import tax will begin this coming week, and will include a 25% tax on steel imports and a 10% one on aluminum.

China is the biggest target of the tariff and lot of people who though the law would be much more focused, see the tax as inane, in other words, attempting to kill a mosquito with an automatic weapon. In effect, Canada and South Korea are the biggest exporters of steel and aluminum to the U.S., Mexico, likewise, one of the top exporters. China doesn’t even make the list of top exporters to the U.S. The tariff was deplored worldwide. The head of the European Commission spoke out against the tax after the large European stock markets fell over 2% on Friday. The PM of Canada called the tax “absolutely unacceptable,” noting that it will disrupt markets on both sides of the world. The Canadian response was very forceful, the tax creating real tension around NAFTA and in relation to other countries worldwide. The import tariff indeed helps American steel and aluminum producers, but at the same time, it could pique inflation and slow down the economy.

The companies expected to be hurt by the move, Boeing (BA) and General Motors (GM) continued falling on Friday as well after having fallen 4% and 3.5% respectively. Harley Davidson (HOG) was hard hit again, falling over 2% on Friday to a 52-week low. On the flipside, American steelmakers like U.S. Steel (X) have demonstrated strength. X indeed fell 1.35% on Friday – but that was after having broken up to a new high on Thursday.

Looking at Trump’s behavior in the past, many market players are optimistic that he’ll retreat or at least lighten the blow of the new tariff. It could be that the market’s biggest problem with the import tariff is that there’s no way to measure its effect on the economy. While U.S. steel and aluminum producers will benefit from the move, all of the companies and industries using these raw materials will now find greater raw material costs. Beer producers have already conveyed that they expect to lay off workers due to the heightened production costs.

And what did Trump have to say about the backlash? 

On Friday, President Trump tweeted on his Twitter account: “When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!”

Besides the heightened aluminum and steel costs, market players have other legitimate concerns about retribution from other countries around the world. Take for example the mounting concern that China will move to cut its soy exports to the U.S. A trade war creates uncertainty, the thing the stock market hates more than anything else. It’s impossible to factor in uncertainty into efficiency, meaning that a vacuum’s been created around support levels.

The market very clearly doesn’t like the import tariff, but is looking for ways to cope with it. There is optimism that some of the terms and stipulations of the tax will be relaxed. Likewise, another claim is that the new tax isn’t too costly – and, in fact, there are investors who are now focusing on biotech and tech stocks, which are not expected to be hurt by the move.

Despite Friday’s rebound, the market has shouldered technical damage and still has to cope with resistance levels looming above.

Have a great trading week!