Trump escalates the trade war
Yesterday, President Trump surprised the markets by announcing that 10% tariffs will be levied on the remaining $300 billion of Chinese goods coming into the US starting September 1. Plus, the US-China trade negotiations restarted this week in Shanghai.
Trump’s announcement of fresh tariffs came right after the negotiation team returned to the US, casting doubts over the deal. Just a couple of days ago, Trump had lashed out at China.
Yesterday, the S&P 500 (SPY), which had traded in positive territory until Trump’s tweets, fell sharply right after the tweets were posted and ended the day 0.9% down. In addition, the Nasdaq (QQQ) dropped 0.8% while the Dow (DIA) ended over 1% lower yesterday.
Asian markets ended deep in the red today. Today, China’s Shanghai Composite and Hong Kong’s Hang Seng closed down 1.4% and 2.4%, respectively. Only the Indian indexes closed in the green.
Trump and the Fed
Trump’s decision to levy additional tariffs came just a day after the Fed cut interest rates for the first time since 2008 but sounded less dovish about the future rate cuts. Trump has been a vocal critic of the Fed and its chief, Jerome Powell. So, the Fed’s rate cut may have informed Trump’s decision to levy tariffs.
It appears that Trump expected a more substantial rate cut. A bigger rate cut would have weakened the dollar, helping American exporters and making foreign goods less desirable. Now that Trump didn’t get his way with the rate cut, he may have opted for additional tariffs to keep Chinese goods away.
Is the time right?
The additional tariffs come into play in an already-struggling global economy. The global manufacturing PMI for July came in at 49.3, indicating a continued contraction in the global manufacturing sector.
Plus, the US manufacturing PMI hit its lowest point since 2009. China’s manufacturing sector continues to be in contraction, and the fresh tariffs may make the matter worse. Following JPMorgan Chase’s caution about a market crash in Q3, we could see more analysts and economists joining the chorus.
Which countries could benefit?
While the escalation of Trump’s trade war negatively affects the global economy, some countries could benefit from it. Vietnam could be the biggest beneficiary from production relocation if the trade war continues. Tech companies such as Amazon and Dell already hope to produce goods in Vietnam, and Amazon may manufacture its Echo and Kindle devices in the country.
Malaysia could benefit from semiconductor production relocation, and Dell could be eyeing the Philippines for notebook production. Thailand, Singapore, Indonesia, and India are some of the other countries expected to benefit from the trade war.
Wall Street responds
Except for utilities, most other S&P 500 sectors ended down yesterday after Trump’s tweets, and semiconductor stocks felt the pressure yesterday. Qualcomm (QCOM) lost 2.68% yesterday and 1% in pre-market trading at 4:58 AM EDT today. Qualcomm derives the majority of its revenue from China.
Broadcom (AVGO), which derives half its revenue from China, lost 1.6% yesterday. Both Qualcomm and Broadcom count Huawei as a major customer. Intel (INTC), which lost 2.1% yesterday, fell 0.79% in pre-market trading at 5:01 AM EDT today.
Micron (MU) experienced a 2.87% loss yesterday, the most significant drop among the semiconductor stocks. MU stock was trading 2.73% down in pre-market activity at 5:05 AM EDT.
Apple (AAPL), which was trading in the green, fell sharply after the news, closing 2.16% down. Apple assembles most of its products in China.