A few days ago, many market participants believed that the trade war saga would have ended up on a positive note with an agreement that suites two of the largest economies, the US and China.
However, this week markets were caught by surprise following Trump’s announcement that China broke the deal, a deal which seems that both parties had agreed upon over the past days.
This led Trump’s administration to hike tariffs from 10 to 25% on Friday on $200 billion worth of Chinese goods. The news rattled markets following a good build-up since the beginning of the year on concrete hopes that this saga will end.
On the news of the tariff hikes, China responded by stating that it will retaliate, an expected scenario given that the Chinese government had already gone down the same route few months ago. What was seen as more positive was the fact that China went for discussions to possibly close-off a deal.
Undoubtedly, the hike in tariffs is another slap to the Chinese economy and the risks of deterioration in the economy will increase, despite the fact that lately we have seen a relatively more benign data.
That said, interesting statistics by a Chinese Central Bank advisor showed that the slap of tariffs will pinch the Chinese economy by circa 0.3%. So the question to be posed is whether these tariffs are nowadays really significant to the Chinese economy.
A known fact, are the measures taken by the Chinese both from the fiscal and monetary front to combat the initial 10% tariffs.
The said measures seem to have been crucial for the improvement in data points, with the latest important data point being Thursday's Price Producers Index, an index which measures prices between manufactures and the wholesale market, which beat estimates of 0.6% and was reported at 0.9%.
Thus, the recent stimulus proved to be a force for the economy to be more resilient to external shocks.
Our base case scenario remains unchanged. Following developments overnight, we believe that ultimately both parties will end up on the negotiating table once again to strike a more amicable trade deal, and the current market noise is solely succumbing to the uncertainty of negotiations.
As with all negotiations it is expected that the parties involved try to strike better deals and this is no different.
It is a fact that tariffs will hinder not only the Chinese consumer but ultimately also the US consumer, which eventually is a drag on economic growth, given that two-thirds of US. GDP is composed of consumer spending. Thus, as I have opined in previous writings, in a trade war there are no winners.
Ultimately, we believe that the current market turbulence will be muted with possibly a positive outcome by Friday. Indeed, Friday morning we are seeing markets trading in the green on the news that discussions will continue today. Let’s all hope for a positive outcome which should continue to add to the gains achieved to date.
This article was issued by Jordan Portelli, investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.