Trade War Volatility Continues – But There Is Hope…

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The latest developments in the trade dispute between China and the U.S. continue to  impact market volatility. Last week the NASDAQ and S&P saw losses ranging from 1.4 to 2% on China’s latest announcement of new tariffs on U.S. exports. This week however, the market is off to a good start, as the rhetoric has been reduced to “trade tensions” from “trade war”.  While many commentators – even those that are often at odds with the President – seem to agree that holding China accountable is a worthwhile undertaking, the question is whether or not tariffs are the most effective tool. That concern is what appears to be driving market volatility.

Aerospace Impact

The market opened higher this morning on an optimistic note, however it’s important to consider that this matter is far from resolved. Last week in retaliation to the proposed U.S. tarrifs, China unveiled tariffs of its own which would impact approximately 1,300 products.

Included in the list is a series of aerospace products including simulators, parts, and entire aircraft. China warned there would be tit-for-tat retaliation, and it followed through with targeted tariffs on the U.S. aerospace industry.

Seattle based Boeing (BA) was just one of the companies that took a hit last week when the Chinese tariffs were announced, at one point dropping 6% in pre market trading. Though Boing has since come off of its lows from last week, international competitors Bombardier (Canada) (BBD), Airbus (France) (AIR) and Embraer (Brazil) (ERJ) could stand to benefit if the Chinese follow through on their threat to impose tariffs on the U.S.

Tech is not Immune

As we predicted in our previous article found here, Caterpillar (CAT) 3M (MMM) and John Deere (DE) have all traded down over the past month, ostensibly because of their revenue exposure to China. But the multinational industrial companies aren’t the only ones that could feel impact of a tariff-based trade war.

Technology could also get hit, because many of the gadgets we love, are either manufactured entirely in China ,or produced in China and assembled in the U.S.. Either way,  tariffs would increase cost to produce these products. In turn those costs will either impact profitability for companies like Apple(AAPL), Samsung Electronics, and Nokia (NOK), or the increased tariff-cost will get passed on to consumers, which would be considered inflationary.

The Hope

This morning in an interview with CNBC, the President’s economic advisor, Larry Kudlow, agreed that tariffs are inherently anti-growth. Perhaps that’s why neither the Chinese nor the U.S. have raced to enact tariffs – so far, it’s all just been a lot of talk. In fact, the Chinese government won’t implement the new tariffs for two months, giving the administration time to negotiate.

Though the U.S.’ threatened imposition of tariffs has rattled the markets, it may turn out to be a spectacular opening gambit. If a trade war can be avoided and China begins to act in a more responsible manner by respecting U.S. intellectual property rights and reducing its own protectionist policies, then the U.S. would stand to benefit substantially.

However until this matter is settled, we expect market volatility to continue.

 

 

Sylva was not compensated by any of the companies mentioned in this article.

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