Stocks Recover As Trade Negotiation May Resume

Posted by Naeem Aslam | 12/07/2018 08:09

Donald Trump ranched up the pressure on China
Trump is picking up the areas where it would hurt the most
China & US may be able to resolve tradewar through bilateral agreement​



US futures and European markets are trading higher on the back of the hopes that the trade talks between China and the US would resume soon at a higher level. Donald Trump ranched up the pressure on China after announcing another huge potential tariff on Chinese products. His latest plan is targeting 10% tariffs on $200 billion worth of Chinese import later this year. Large consumers of Chinese imports are the target market here and they would be hit hard as a result of this.
 
In other words, trade war concerns are all over the traders' dashboard again. Trump is serious about punishing China, he is picking up the areas where it would hurt the most. Although, market participants still aren’t factoring in a full trade war. The hope is that China and US would be able to resolve this matter through bilateral agreement. But uncertainty around this matter has anchored up. The sad aspect is none of the parties are ready to throw in the towel yet which makes me think that there is no resolution in insight yet. Beijing has threatened for retaliation action against the current measures.
 
Therefore, over the coming days, I would expect a tit-for-tat reaction from China-unless the bilateral discussions resume between the two parties. The alarming area is if China chooses to go after the multinational companies which are operating in China. Certainly, that is the area where it would create more wounds. We think that the odds are high that China would specifically pick on US firms or at least it would shift the grounds in such a way that other foreign firms would have more privileges being in China on relative perspective. After all, China isn’t going to sit on its hand and see its GDP dragging lower by another 0.2% if the new tariffs become effective.
 
The Chinese yuan has already depreciated since Donald Trump has announced another $200 billion in new tariffs on Chinese products. China has a few options to answer this; it can let its currency continue to depreciate, there is an option of selling the US Treasuries , China can choose to answer this by applying fiscal subsidies to exporters, change the level of playfield for US firms and finally just put the same amount of tariffs on US products.
 
The impact of the trade war would be prominent in base metals as well particularly in copper. If China chooses to fight back the current tariffs, we would expect the copper prices to move lower. Afterall, if the Chinese GDP is going to get back and it is also going to have an impact on the US economy, the copper demand would naturally move from its current place and that would have an adverse effect on its price.
 
Having said this, it is important to mention that we are in uncharted territory because trade tariffs of current magnitude isn’t a familiar scenario in the modern era. Therefore, I think that it is fairly arduous to predict the cumulative impact.
 

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