Escalation of the US-China trade war and what it means for the market

After a week of threats to increase duties on Chinese goods from 10% to 25%, on Friday (10.05.2019), the United States raised duties on Chinese imports in the amount of about $ 200 billion, indicating that the representatives of the United States and China did not succeed reach agreement on trade relations.

Earlier, Chinese representatives said they regret the current situation, but will be forced to retaliate against the US duties, in fact, taking the position of “victim” because of the US duty. Such statements only increased the pressure on the Chinese yuan, and caused an increase in negative sentiment. Earlier, China’s participants in the trade negotiations expressed cautious optimism about the results.

In addition to the fact that the states have already introduced duties on Chinese goods worth $ 200 billion, the US President D. Trump also initiated the process of preparing for duties in the amount of $ 300 billion, which means all imports from China.

Given the current situation with the actual full use of duty and the position of the White House, which is very optimistic about the duties on Chinese goods, the United States is ready to completely unleash a trade war with China.

What should markets expect from a trade war?

• The Chinese yuan will be the first one to fall as a victim of a trade war, but that was clear from the sale of the Chinese currency on fears. Given the monetary policy of China, the depreciation of the yuan is not so rhythmically. But the fears of the Chinese economy may cause its slowdown, as it was after the first duties from the United States. Thus, the slowdown in China’s economy later became the main cause of a slowdown in the global economy.
• Stocks waiting for the negative opening of the week. Earlier message that representatives of China will arrive at the negotiations in the states is not as much as cheered up the stock market. The US tariffs and waiting for a response from China will put significant pressure on global stock indices. The collapse of the stock market is expected from Asian to American trading platforms.
• Against the background of risk aversion, the US dollar is the safe haven currency. But the strengthening of the American will be limited to Trump’s relatively strong dollar policy, which is not beneficial to the Trump administration’s plans and budget deficit reduction goals.

Soon we should not exclude the possibility of a new political pressure on the Fed. So, Trump has repeatedly criticized Fed Chairman Powell, and Trump’s latest tweets about lower rates and rising the US stock indices could be the logical conclusion of the US-China trade standoff.

Thus, in 1998, the Fed lowered interest rates three times as the global economy slowed down, which caused a rise in  the US stock indices and triggered a bubble in the stock market.

Anton Hanzenko