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Could This Be the Beginning of a Trade War?

Written by Monica Savaglia
Posted May 7, 2019

A lot has changed in politics since Trump took office.

One huge difference that stands out is that you can’t get President Trump off Twitter, where he tweets about current events and politics — things most politicians and past presidents would never dream of sharing with the public. Trump, with no second thought at all, shares his thoughts about anything and everything via Twitter.

This was one of the reasons people voted for Trump. During the presidential campaign, I remember watching interviews with people who, when asked why they were voting for Trump, most often responded with: “Because he says it like it is.”

Don’t get me wrong; I think some transparency is a good thing, especially when it comes to the president and the American public. Being left in the dark about certain issues, especially ones that pertain to you and your family, isn’t fair. However, having a president go on rants talking about negotiations with another country is worrisome.

Over the weekend, Trump tweeted about how tariff negotiations are going too slowly and how he is considering boosting tariffs on China. His tweets and threat of increasing tariffs on China had a significant impact on the global markets. He said he would hike U.S. tariffs on $200 billion worth of Chinese goods this week and soon target hundreds of billions more. Volatility went soaring this Monday.

Facing the Repercussions of Trump's Tweets

The VIX jumped about 46% — it hasn’t seen that big of a jump since the volatility breakdown in February 2018. In addition to that, the S&P 500 Index futures slid 1.5%, and the Shanghai Composite fell 5.6%, the most since February 2016. Hong Kong’s Hang Seng Index was 3% lower, and some major European stocks opened more than 2% lower on Monday morning.

The U.S. president’s tweets have had an effect on the world. The U.S. and China are two of the most influential economies in the world. What happens between these two countries will have a global impact.

Michael McCarthy, chief market strategist at CMC Markets Asia Pacific Pty in Sydney, said: “It might not be as bad as it looks.” However, he went on to say it’s “very likely to undo all of the positive momentum we’ve seen.”

Lately, things have been running smoothly in the market. There hasn’t really been any turmoil plaguing the markets, at least for a while.

It’s unclear if this is some kind of negotiating tactic coming from the U.S. president. Trade talks between China and the U.S. were scheduled for this Wednesday.

Could the U.S. and China Reach a Mutually Beneficial Agreement?

It’s been rumored that China was considering canceling those talks and having its delegation return to China instead of continuing its journey to Washington. However, that’s not true. Chinese Foreign Ministry spokesman Geng Shuang confirmed that a Chinese delegation is preparing to go to the U.S. for talks.

Geng said:

The urgent task right now is for the United States to work with China and move in the same direction so that we can reach a mutually beneficial and win-win agreement based on mutual respect.

Trump tweeted about how he thinks the conversation with China should go — information he should keep to himself. Being accepting to negotiation talks is diplomatic, and it’s how a president should act. Trump’s behavior is rash, and unfortunately, it causes turmoil in the markets. Not to mention it reverts all the success and stability we’ve amassed throughout the past few months.

Tech Companies and U.S. Automakers Are Already Feeling the Pain

Andrew Tilton, chief Asia-Pacific economist at Goldman Sachs Group Inc., recently said:

Market pricing assumed there would be some kind of a deal, and no further escalation in tariffs. And meanwhile the growth outlook was actually improving.

He went on further to say:

This raises the specter of a significant hit to growth should these tariffs escalate and should the uncertainty associated with that weigh on investment going forward.

Industries involved with trade with China are experiencing the worst of it. U.S. automaker stocks fell after Trump’s tweets. General Motors (NYSE: GM) was down 2.9% in the premarket, Ford (NYSE: F) was off 2.5%, and Tesla (NASDAQ: TSLA) was 2.2% lower.

Shares from major Silicon Valley technology companies fell at the opening bell on Monday. Apple (NASDAQ: AAPL) fell 3.5%, Intel Corp. (NASDAQ: INTC) fell 2.9%, and Advanced Micro Devices (NASDAQ: AMD) fell 5.3%.

Trump tweeted:

For 10 months, China has been paying Tariffs to the USA of 25% on 50 Billion Dollars of High Tech, and 10% on 200 Billion Dollars of other goods. These payments are partially responsible for our great economic results. The 10% will go up to 25% on Friday. 325 Billion Dollars…

These words directly affected tech companies in the U.S. — companies that rely on Chinese imports of chips, components, and other products. Higher tariffs could result in higher consumer prices and thinner profit margins.

Is This the Beginning of a Trade War?

Government officials were giving the public optimism when it came to trade talks with China, but that optimism has now been squashed because of Trump’s tweets and his outspoken opinion on the talks. It makes us believe the talks aren’t going as well as we originally thought and that both parties could have some type of conflict they haven’t been able to overcome.

Goldman Sachs said:

The most important near-term indicator to watch will be whether the large delegation of Chinese officials comes to Washington on May 8, as scheduled. If they do, this would indicate that they believe a deal is still reasonably likely.

Only time will tell. We have two days until trade talks continue. If the U.S. and China can’t come to some kind of resolution by then, a trade war could break out. If there is no resolution, you’re going to want to start reconsidering your investments.

Until next time,

Monica Savaglia

Monica Savaglia

Monica Savaglia is Wealth Daily’s IPO specialist. With passion and knowledge, she wants to open up the world of IPOs and their long-term potential to everyday investors. She does this through her newsletter IPO Authority, a one-stop resource for everything IPO. She also contributes regularly to the Wealth Daily e-letter. To learn more about Monica, click here.

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