Prominent figures across the investment industry have offered their thoughts on US president Donald Trump’s proposed 10 percent tariff on $300 billion worth of Chinese imports and how it could affect both the markets and investor decisions.
The tariffs, which will take effect in September, are targeting goods that have so far been unaffected by the country’s burgeoning trade conflict with China. It would be in addition to the $250 billion worth of imports affected by the current 25 percent tariff.
The announcements of further tariffs were followed by a depreciation of China’s yuan currency, as the yuan fell below the symbolic line of seven to the US dollar for the first time since 2008, resulting in the US labelling the Chinese banks as currency manipulators.
Trump’s tariffs: should investors be surprised?
Three senior members at Lombard Odier: Carolina Moura Alves, head of asset allocation, Bill Papadakis, macro strategist and Vasileios Gkionakis, global head of FX Strategy have collectively analysed the market implications of the decision and the wider friction between the world’s two most powerful economies.
They believed that the emerging tariffs belied expectations that Mr Trump would soften his stance as a consequence of the positive talks between himself and Xi Jinping, the Chinese premier. However, with China responding to the tariffs forcefully, the trio believe the conflict could continue for a while longer even as Mr Trump pressurises China for a deal.
They said: “This development came as a surprise after the Trump-Xi “truce” in their late-June Osaka meeting, and after the two sides had resumed negotiations. The first meeting between high-level officials took place in Shanghai early last week, and the next is scheduled for early September in Washington, DC. However, President Trump has now decided to respond to the lack of progress in talks by escalating tensions further, possibly hoping that the threat of new tariffs could push the Chinese to try to strike a deal with more urgency. China has responded by allowing the yuan to depreciate and by suspending imports of agricultural products from the US.”
Paul O’Connor, head of the UK based multi-asset team at Janus Henderson, echoed the view that the move caught investors off-guard.
He said: “The decision by President Trump last week to put 10 percent tariffs on $300bn of Chinese exports surprised investors and revived fears that global trade conflict is escalating.”
Rupert Thompson, head of research at Kingswood, acknowledged Mr Trump’s ability to take hold of the news agenda.
“The big event last week was all set to be the Fed’s decision to cut rates by 0.25 percent, the first reduction since the financial crisis. Instead, President Trump hijacked events with his unexpected announcement that the US will impose a 10 percent tariff on an additional $300 billion of Chinese imports from 1 September, on top of the 25 percent tariff already in place on $250 billion of Chinese imports,” he argued.
An effective strategy or a misjudgement?
Mr Thompson argued that the effects of Mr Trump’s tariffs can already be felt across the economic landscape, with both positive and negative effects for investors.
He said: “Trump’s move has pushed markets into risk-off mode. Global equities are now down some 4 percent or so from their recent highs following additional declines this morning. Safe havens, meanwhile, have benefited with government bond yields taking another lurch lower and gold taking another step up.”
Commenting on the response overseas, Mr Thompson pointed to the symbolic dip in the yuan currency value.
He added; “China has not surprisingly said it will retaliate. Whilst it is running out of goods on which to impose tariffs because of the trade surplus it runs with the US, it has other levers to pull. It can make life much more difficult for US businesses operating in China and it can also allow its currency to weaken. Indeed, the yuan has just fallen through a key level.”
The three analysts from Lombard Odier suggested that “Trump’s tweet announcing new tariffs on Chinese goods has irritated market participants further”, after the fallout last week from the Fed’s decision to implement interest rate cuts.
“This has led to a drop-in equity prices, an increase in the price of gold and appreciation of the JPYUSD as of 31 July,” they argued.
Mr O’Connor believed that the impact of Mr Trump’s further usage of tariffs highlighted the wariness investors felt about risk.
He said: The price action in financial markets in recent days confirms just how sensitive investor risk appetite is to developments on the trade front.”
The UK multi-asset leader further suggested that investors will be further uneased by reports that “China is halting imports of US agricultural products” alongside the weakening of the Yuan. It was less to do with the material effects of tariffs but the perception that the economic conflict would create.
He explained: “The big risk here is that any further deterioration in business sentiment could undermine already-weakening capital expenditure and employment plans in manufacturing and spill over into the hitherto-resilient service sector and consumer spending. While the scale of these risks is hard to calibrate, the direction is clear – every escalation in trade tensions is rightly being interpreted as yet another threat to global growth.”
US-China: The Next Step?
Mr O’Connor outlined the near-term stimulus measures he expected China to implement, in an attempt to “cushion the Chinese economy from adverse developments on the trade front”.
He was sceptical about whether domestic measures by other global powers would effectively mitigate the costs of an escalating trade war.
Beyond that, central banks in the major economies will do their best to ease economic tensions, although probably not for a month or two. However, until there is a plausible path to a meaningful de-escalation of the China-US conflict, these sort of policy interventions will probably only partially offset the domineering impact of trade concerns on economic and market sentiment. For now, trade trumps all,” he said.
Mr O’Connor also pointed to the wider concerns from the trade, conflict, suggesting it might represent a broader theme that could trouble investors.
He added: “Investors are already trying to evaluate the impact of the current trade dispute between Japan and Korea and are on standby for any resumption of US global actions on autos or US-eurozone trade hostilities. Beyond this, the drop in Yuan has already caught Donald Trump’s eye and has investors on edge in case currency wars are about to become a new area of international conflict.”
George Efstathopoulos, multi asset portfolio manager, Fidelity International, noted that Mr Trump had not yet dismissed the idea of some form of currency intervention.
He said: “President Trump has been very vocal in lamenting US dollar strength and its threat to his economic agenda. He’s failed to rule out currency intervention when asked directly and has a good track record of following through with his warnings. The chance of getting his way is surely higher now the Treasury have labelled China a currency manipulator and because the same department also has responsibility for setting US dollar policy.
He argued that the depreciation of the Yuan’s value could heighten the conflict between China and the US in damaging ways.
“This latest move at least levels the playing field somewhat and opens the door to a currency war, which would certainly up the ante in the trade war. However, it could prove counterproductive considering that in recent times, China has intervened to stop their currency from depreciating further rather than manipulating their currency weaker as accused by the US. China has used the ‘counter cyclical factor’ method for setting the value of the yuan, aiming to limit volatility rather than target a specific value. Should a currency war ensue, China might be less willing to prop up the renminbi,” he suggested.
In his concluding thoughts, Mr Efsthopoulos added: “While not my base case, the prospect of a US-China currency war is worrying and has risen in probability. I expect demand for safe havens to persist. Both the Japanese yen and gold should benefit if the situation escalates. More interestingly, the euro could be one of the biggest beneficiaries, bringing an end to 18 months of depreciation against the US dollar.”
