Major Blow on Trade Front Sends Markets Reeling
After the market enthusiastically rose after hearing what normally would bad news, Donald Trump had more bad news for them, and this time the news was unequivocally bad.
One day after seeing people’s hope of further interest rate cuts by the Fed set aside, they got some numbers that they could hang their hopes upon once again. We know that the current slowdown in manufacturing was one of the factors that the Federal Reserve Open Market Committee took into account when they decided to throw us a quarter point bone on Wednesday, so when we got some more disappointing results on that front, this did cause the market to have its optimism about more rate cuts this year renewed.
This is not the first time we’ve seen the market rally on bad news that is perceived to increase the chances of a rate cut, and when the market is really seeking more, as it clearly is these days, bad news like this can excite them. Stock market bulls certainly don’t want to see bad economic news and these things normally dampen things, all things being equal that is, but these concerns can not only be offset if you think this will cause the Fed to become more dovish, it can even surpass them, and in a pretty big way sometimes.
A 300-point rally in the Dow would certainly qualify as enthusiastic, and we were in the midst of a very nice up day and a recovery from the disappointment of Wednesday’s Fed announcements. It wasn’t so much that the market was so put off by just getting a quarter point, it was that we were hoping that the Fed would tell us that they are seeing enough to plan on doing more later in the year, and that’s the part we didn’t get and why stocks took a downturn on the news.
The trade war with China is also seen as a big deal by the markets, and an even bigger one in fact. If anyone had doubted that, all that they had to do is watch how the market reacted to Trump’s announcement that he was planning to slap a 10% tariff on a further $300 billion’ of Chinese imports, starting September 1 of this year.
The trade war and the effect of present tariffs that have resulted from it is certainly one of the biggest things that is concerning the Fed right now, and Chairman Powell has specifically mentioned this several times, including this factoring in to their latest move. If you were looking to get excited about bad news actually sending the Fed scurrying, this definitely would qualify.
However, the specter of these tariffs completely overwhelmed any excitement over the prospects of further rate cuts, and we not only saw the 300 Dow points that were created earlier in the day be clawed back by this news, we saw another 300 points get taken off the table. We ended the day near the lows, and there may indeed be more where that came from as markets continue to digest this into Friday’s session.
While the selloff on Wednesday didn’t really persist and was recovered from pretty easily, as is often the case when news really isn’t all that bad and the market comes to its senses a short time later, this latest bomb from President Trump is not of this sort at all, and may see this selloff persist for a while.
We only need to look at what happened this past May to get a taste of this, and May saw us give up about 1700 Dow points due mostly to the trade war with China moving the wrong way. This was at a time where many people felt that a trade agreement may just be around the corner, and what we got instead was an escalation of tensions and indications that the battle may wage on longer than we thought.
There was some renewed optimism of late though as talks have resumed, with the U.S. delegation just returning from a trip to China to work further on ironing out the remaining wrinkles. While there wasn’t all that much accomplished on this trip, the parties were at least sitting at the table together again.
Trump Tweets His Wrath on Markets and the Economy Once Again
Then Donald Trump dropped a bomb on us. He had already made it plain that he had more tariffs at the ready, on $300 billion more Chinese imports, but he had decided not to play that card yet for whatever reason. Thursday was the day though, although he did phrase the move as imposing a “small” tariff, and although 10% is smaller than 25%, the impact of this upon American business and the American people won’t be small.
We may even rightfully wonder whether Trump even realizes what he is doing when he makes remarks such as this taxing the Chinese. That does look good in the media perhaps, and a lot of voters might take his characterization of this to be true, but this doesn’t tax Chinese, this taxes Americans, and does so directly.
There are several reasons why the stock market absolutely hated this move and we will likely see the full measure of this dislike in the days to come. This starts with the fact that, while this is “only” 10%, there are a lot of consumer goods caught up in this particular net, one that will have a lot of people paying more for what they buy, 10% more in fact.
The retail sector simply got hammered by this announcement as they will bear the biggest brunt of this. Electronics retailers such as Best Buy really took it on the chin, because so much of what they sell is subject to this additional tax, although the sector in general got beat up and not without good reason.
Chinese imports benefit the American economy and the American people greatly, as they allow us to purchase a lot of the things that we want at lower prices than we would be paying otherwise. The Chinese can make a lot of things a lot cheaper than we can, and even with the added costs of freight, this represents a big bargain and allows us to get a lot more value for our money.
If we were in a situation where there was only a marginal difference between these imports and competing goods, then the effect would be a negative one but would only involve these small differences. If something from China cost $100 and a similar American product cost $102, jacking the price of the Chinese product to $110 would just cause people to pay the $2 more for it to buy the domestic good.
The actual gap is far wider than this and enough that these imports are still going to be the better bargain, meaning that the full brunt of this will need to be borne by American consumers. Even a 25% tariff would come out this way, and while Trump has been kind enough to only slap his own people with a 10% tax, raising this down the road is certainly not off the table, especially considering that he put this one in place at a time when prospects were looking more decent.
If we reach an actual impasse, or if this battle goes on long enough, it’s anyone’s guess how much further Trump would be willing to go, but it’s a safe bet to assume that he hasn’t used all his missiles here yet, and there may be several left in his arsenal, including some bigger than the one he fired on Thursday.
This Weapon is Clearly Aimed at His Own People
Make no mistake though, this missile is aimed at not China but at the United States, and aimed at his own people not indirectly but directly. If this sort of thing is meant to benefit American business, business leaders are not exactly welcoming it with open arms and are in a furor over this latest development.
This tariff will cause direct damage to the American economy. In most cases, people will just have to pay it, which means that they are spending more of their money on these things and less on other things. Should they no longer be able to afford the imports, they just won’t buy the item, because if a complimentary American substitute even exists, and it may not, it would cost even more and they could not afford that either.
A lot of goods sold by American companies to Americans are made in China and therefore subject to this new tariff, who just rebrand them, so this goes well beyond what some might think it would. This will bring on some real pain, and while this will impact sales in China as well, losing the segment who got priced out of their goods, the majority of the damage occur will be right here in America.
We also have to think about what this latest move will do for the trade talks, and it’s hard to imagine this move making things better, or not making things worse. The Chinese aren’t that fond of being pushed around and the best opportunity to resolve this is to focus on the resolution being a collaborative effort, not a combative one, and more combat tactics aren’t the way to win this particular war.
The bond and the gold market were beneficiaries of this news though as both rallied strongly. The media is confused when they focus on the yield side of the bond market and assume that this is bad for bonds, but the opposite is true, and yields going up with bonds only means one thing, a bearish move.
If people really didn’t like the yields, to an extent that this mattered and influenced the market, this would exert downward pressure on the price of bonds. That’s the opposite of what we are seeing now as people fall over one another to put upward pressure on them.
Those who had the idea that gold was overpriced or that the Fed would be so dovish as to drive the price of gold down a lot got handed their shirts on Thursday, as gold rallied all day and the rally intensified on this news. There were even calls to short gold earlier in the week, but we need much better reasons than the ones that were put forth to make sense out of such a move, and those who did saw that trading without enough sense is indeed unwise.
Oil simply got toppled by all of this, although we are seeing a bit of a recovery in the aftermath, this was not a time to be long oil for sure. This is another reason to be concerned about the U.S. economy, with all the oil the U.S. produces, but the effect here is not on oil itself but on the negative effects that these new tariffs will have on the economy, which is not what the U.S. economy needs right now as it battles to keep its head above water.
If we are concerned about a recession coming, as some are, there may be no better way to bring it on than with tariffs like this. While this probably won’t be enough to get us there, more of this certainly could, as could the battle waging on too long, and all of this is very much still on the table.
It is very hard to imagine how this advances Trump’s re-election campaign, as the media is pulling no punches on this one in particular. The message that things are about to cost more and Trump is to blame will be made clear enough to people, especially when this message is coming from American business leaders and will be reinforced at the check-out and in the economic data.
This is all a big enough blow to the stock market that we may even want to step aside for a while until the dust settles more, and it could take a while for this to happen given how much dust this created.
Editor, MarketReview.com
Eric has a deep understanding of what moves prices and how we can predict them to take advantage. He also understands why so many traders fail and how they may help themselves.
Contact Eric: eric@marketreview.com
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