Global investors shuddered on Thursday at the prospect of the Trump administration raising the prospective tariff on an additional $200 billion in Chinese goods to 25% from 10%.
On Wednesday evening, officials confirmed that Trump has directed Robert Lighthizer to ponder more than doubling the planned rate on the next round of duties, a move ostensibly designed to force China to the table amid separate reports that Steve Mnuchin is attempting to get the ball rolling again on negotiations.
“China has made full preparation for the U.S. threats to escalate the trade war, and will have to retaliate to defend national pride and the people’s interests,” the Chinese Ministry of Commerce said Wednesday, in response to Trump’s latest threat.
“The U.S. is playing a carrot-and-stick tactic on China, but this approach is not going to work,” Beijing warned.
This isn’t welcome news for markets coming as it does just a week after Trump deescalated tensions with the European Union. The U.S. President’s “deal” with European Commission President Jean-Claude Juncker (announced to much fanfare in a press conference from the Rose Garden last week), was generally seen as a step in the right direction that might bring the Chinese to the table, but critics argue the agreement failed to address the auto tariffs (the biggest point of contention between Washington and Brussels) and could conceivably make Trump even more aggressive when it comes to China.
“The [Juncker] agreement is likely to embolden the White House to use proposed tariffs to try to win concessions from other trading partners, like China”, Goldman wrote, in a note dated July 25, adding that “the recent announcement of supplemental agricultural subsidies to counter the effects of retaliatory tariffs pushes in this direction as well.”
Indeed, one could easily make the argument that between Beijing announcing a more “proactive” approach to fiscal policy and Washington falling back on Depression-era tactics to subsidize U.S. agriculture, both sides appear to be digging in for a protracted war of attrition.
Whatever the case, markets are concerned. Mainland Chinese shares were crushed on Thursday for the second day in a row, with the Shanghai Composite falling more than 2% after Wednesday’s 1.8% decline. The benchmark has fallen in six of the last seven sessions and looks like it wants to revisit the July lows.
The CSI 300 is similarly beset:
In Hong Kong, the Hang Seng had its worst day since June 19, and has fallen in four consecutive sessions. The index is now sitting at its lowest levels since September.
H-shares’ feeble attempt to pull themselves up off the mat in late July is starting to look more and more like just that – a feeble attempt that’s destined for “dead cat” status.
Don’t forget, H-shares were once the darling of the global equity scene. Back in January, the Hang Seng China Enterprise Index was the poster child for euphoria, rising an incredible 19 consecutive sessions at one point.
It’s worth noting that Tencent is in the middle of a truly harrowing slide. It’s lost nearly 8% this week alone and is sitting at 10-month lows. In November, Tencent blew past Facebook in market value, making it the first Chinese tech name to join the ranks of the world’s five largest companies.
The shares have fallen for eight consecutive weeks, and Tencent has lost something on the order of $160 billion in market cap since January.
You get the idea. It would appear that tech jitters combined with renewed trade threats and aggressive rhetoric from both sides have conspired to offset any relief that Beijing managed to engineer in Asian equities by promising to take a more proactive stance on fiscal policy.
As ever, this is always a question of how resilient U.S. benchmarks prove to be. Whether Wilbur Ross admits it or not, Trump is indeed prone to changing his mind on trade policy depending on how things shape up on Wall Street.
What makes this latest episode of global risk-off sentiment interesting is that it seems to be related to recent weakness in FANG stocks, which speaks to the idea that even if U.S. equities are somewhat inoculated in the near-term from the trade wars, late-cycle fiscal stimulus can’t fix a Facebook miss (for instance).
Remember, if Trump does indeed move to apply a 25% tariff to $200 billion in additional Chinese goods after he slaps duties on another $16 billion in imports, the read-through for domestic inflation and thus for the Fed will not be trivial.