Three Areas to Watch in Trump Vs. China Trade Spat
This is an effectively an embargo and the Chinese have enacted the same tariffs on the U.S.
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Equities enjoyed a massive relief rally on Wednesday, where the Nasdaq had its second-best day in its history. The rally, however, turned out to be extremely short-lived. After rising better than 12% the day before, the tech-heavy index gave back just over 4% on Thursday. The other major indexes barfed up similar sized gains from the previous day’s trading session. All of this was due to evolving trade and tariff policies.
Little more was done around the significant and growing trade inequities on the U.S. trade front for more than a generation other than send the proverbial sternly worded letter. The new administration has done a complete 180 in that regard and moved way too far, way too fast and without a well-thought-out game plan. After all, it is not like a company can reshore or near shore a manufacturing facility in a few months, let alone a few weeks. But it appears we have crossed the Rubicon for the country’s trade practices going forward.
As it stands now, most products coming into the U.S. will face a 10% global tariff. China will face a massive 125% tariff rate. This is an effectively an embargo and the Chinese have enacted the same tariffs on the U.S. How this will play out will be utterly fascinating to watch in the coming weeks and months. Here are three of the key things I will be watching closely:
First, what is China’s longer-term response? Do they start serious trade negotiations with the U.S.? Does China dump their treasury holdings or significantly devalue their currency -- or both -- to blunt some of the impacts of this new tariff regime? Where does the over $500 billion of goods exported to the U.S. get rerouted to? China can move some of this excess through countries like Vietnam and Mexico to get a lower tariff rate, but the bulk of those goods will likely have to be dumped elsewhere. How much will Europe accept before industry and the European political establishment pushes back hard on these increase imports?
Second, with a 90-day window, which could be extended, what happens on the non-China front will also be intriguing. I think investors and the market need to see some fruits from this new trade policy, which contains a huge China isolation gambit. New trade deals that dispose of both tariffs and other obstacles to increase U.S. exports would go a long way to calm the markets.
Finally, where does the yield on the 10-Year Treasury head? The spike up in this yield seems to be the key factor that triggered the huge reversal in tariff policy by the administration on Wednesday. I believe it will be a primary determinant of where the stock market goes from here. If I could have one data point from a month out to project where equities will be 30 days from now, it would be where this yield stands.
With little clarity in the markets until these key events play out, I will continue to sell the rips, buy the dips and keep plenty of dry powder on hand. This truly feels like a paradigm shift for global trade, the economy and the markets.
At the time of publication, Jensen had no position in any security mentioned.
