The US-China trade war
One often-cited reason for the current market volatility and the reason for expected pressure on companies’ earnings is trade uncertainty, especially between the United States (SPY) and China (FXI). While the markets weathered the first two rounds of tariffs from the United States (IVV) (VTI) with relative resilience, the third round was quite inclusive and led to business and consumer sentiment deteriorating.
Tensions about to escalate further?
The third round of tariffs on $200 billion in Chinese goods could go up to a 25% tariff at the beginning of 2019. In an interview with The Wall Street Journal on November 26, Donald Trump said it is “highly unlikely” that the United States would delay increasing the tariffs from 10% to 25% come January 1. Moreover, Trump has been quite vocal about bringing another $267 billion in Chinese imports under tariffs if negotiations don’t produce a favorable outcome.
While some investors were hopeful that Trump and Xi Jinping’s meeting on the sidelines of the G20 summit in Argentina could bring them closer to a trade deal, Trump’s comments have quashed most of those hopes.
Impact on businesses
One of the tariffs’ direct impacts on imports has been in the downstream sector. The US auto sector (CARZ), for example, has made it quite clear how its fortunes are being affected by steel and aluminum import tariffs. Due to tariffs on Chinese goods and counter tariffs from China, the supply chains of many US multinationals have come under pressure. Many market participants believe that the trade war continuing in 2019 could reduce global economic growth significantly, including that of the United States and China.
So far in this series, we’ve discussed major market concerns. In the next few parts, we’ll see how major investment banks suggest investors play this market. We’ll start by looking at Bank of America Merrill Lynch’s take on markets in 2019.