Trump Goes All-In on Trade
President Trump pushed his chips to the center of the table early Sunday afternoon, threatening to increase tariffs on $200 billion worth of Chinese goods by the end of the week.
Trump broke his trade war silence with a series of tweets explaining his plan to increase tariffs on the Chinese goods to 25% from 10%. The president also threw another $325 billion in goods into the mix that have yet to be taxed, claiming the White House would enact another round of tariffs, also at 25%.
Trump’s announcement took China by surprise and officials are considering cancelling this week’s talks that many believed would lead to a deal by Friday, according to The Wall Street Journal.
“Chinese officials have said Beijing wouldn’t bend to pressure tactics,” the WSJ reports. “By potentially scotching the trip, Beijing would be following up on its pledge to avoid negotiating under threat.”
While Trump probably hoped his tweets would put some pressure on Beijing ahead of this week’s talks, world markets have quickly become collateral damage.
The Euro Stoxx 50 has already tanked as much as 2.3%, which Bloomberg notes is its biggest intraday drop since Dec. 6. Chinese stocks fared even worse. The Shanghai Composite dropped more than 5.5% on the day, MarketWatch reports, while the small-cap Shenzhen Composite lost more than 7%, notching its biggest drop in since February 2016.
U.S. stocks are also prepping for big losses at the opening bell. Dow futures are pointing to a loss of almost 500 points, while the S&P 500 and Nasdaq Composite could open lower by as much as 2%.
So much for those all-time highs the bulls were celebrating last week…
We can always rely on politicians or the financial media to drag tariffs back into the fray when the news cycle slows down.
In fact, the last time I uttered a peep about the trade war was back in early April when the press was latching onto a Trump tweet threatening new tariffs aimed at the European Union. At the time, I said that the president’s online outburst probably had nothing to do with the market’s retreat — stocks just needed a quick break. The S&P had just posted eight straight days of gains. A little pullback following a virtually uninterrupted two-week rally was nothing to worry about.
Unfortunately, Trump’s Sunday tweets aren’t going to just disappear into the ether this time around.
Following yesterday’s announcement, trade war news will most likely dominate market discussions this week.
Our two-month trade war respite is over.
Back in early March, the media told us the U.S. and China were in the “final stages” of completing a deal. Looking back, it’s clear the two sides were nowhere near anything resembling an agreement.
While the White House has successfully kicked the can on the trade war so far this year, we’re going to need to see a formal deal — not just rumors or Twitter threats — to lift one of the major economic black clouds dogging the market since Trump took office.
In the meantime, we’ll need to manage our trades carefully as the tariff drama plays out. Stocks were looking particularly bullish heading into the weekend, especially the iShares Russell 2000 ETF (NYSE:IWM). The small-cap index gained nearly 2% on Friday to post a fresh breakout and new 2019 highs. This move and others are now in jeopardy as the bulls stage a retreat.
I’ll keep a close eye on this trade and the rest of our model portfolio as the tariff spectacle plays out today. We’ll need to see where buyers are willing to step in following last week’s strong performance. If we need to make any moves, I’ll update you in tomorrow morning’s alert.
Hang in there!