Displaying items by tag: tariffs

(New York)

The Dow had a very ugly day yesterday, as did the Nasdaq and S&P 500. However, that might just be the beginning, argues Barron’s. Markets plunged as Trump escalated the trade stand-off with China and other US trading partners, including limiting Chinese investment in American technology companies. And while markets have been looking at a possible trade war for months, it seems as though they have not fully priced in one of the magnitude which now looks to be emerging. According to one analyst, “Markets are starting to price in the possibility of a trade war with China, however, I would argue that a true trade war–one that drives us into a worldwide recession–would lead to a 20% or more drop in prices, so we haven’t priced one in yet”.

FINSUM: This is a very ugly, but realistic, prediction. We are increasingly worried about the direction of the international dispute on trade.

(Washington)

The trade war between the US and China is intensifying. Investors will already be aware of the tit-for-tat $50 bn tariff packages the US and China have placed on each other, as well as Trump’s plan for a further $200 bn to be applied. However, the news is that Trump is now also preparing a comprehensive package of blockages to Chinese direct investment into the US. The amount of Chinese overseas investment flowing into the US has already plummeted to $1.8 bn in the first half of 2018, down from nearly $50 in 2016.

FINSUM: This trade spat just keeps escalating. The big risk is if China decides to sell US Treasuries and agency bonds as a payback, but we think that is still a few steps away.

(Washington)

Last week was a brutal one for markets. The Dow fell about 2% over the week as the index approached its longest losing streak since 1978. However, the reality, according to Barron’s, is that the US is winning the trade war, at least so far. Trump has already imposed $50 of tariffs, which China responded to in kind. However, Trump is planning another $200 bn, while China only imports a total of $130 bn of goods, meaning they have much less room to retaliate. Further, US financial markets are much more broad and deep, meaning there are more places for investors to safely stash their money.

FINSUM: China does not have too many options to retaliate. If they devalue the yuan it will really hurt their markets; if they sell Treasury bonds they will either find no buyers (if they sell a lot at once) or the market will just absorb it in smaller bits.

(Beijing)

All our readers will be aware of the intensifying trade war between the US and China. And while the US seems to have a strong position on trade (with less to lose than its partners), that is not the whole picture. The reality is that the US makes up much of what it loses on trade through massive overseas investment Dollars that flow into US assets. While much of the public’s awareness of this centers on Treasury bonds, one other big area of foreign participation is in MBS, or mortgage bonds. What is much less known is that more recently, foreign buyers, including China, have been much bigger consumers of US mortgage agency bonds (e.g. Fannie and Freddie).

FINSUM: China has the power to simply turn off the spigot on the mortgage market, which could lead to a surge in interest rates and a resulting collapse in prices. That would put US politicians in more hot water than tariffs ever could.

(Washington)

There have been a handful of articles lately presenting how one can protect their portfolio from the current trade war (hint, stay away from food companies and autos). But there have been many fewer saying how to buy into the trade war. The answer is that investors should buy less vulnerable sectors, such as semiconductors and biotechnology, which will not be as impacted by tariffs. Banks are also likely to prosper as the economy continues its run.

FINSUM: We think the idea of biotech and banks is quite a solid one. Both seem to have little direct exposure to tariffs.