Trade War: Markets reeling


At the time of writing, the local share market is down 4.5 percent since the beginning of Monday trading - all due to the heightening trade tensions between the US & China.

It’s a cliche, but a week really is a long time in politics. Last Monday, despite some pretty bruising words, both sides were pressing ahead with their negotiations, attempting to find at least some common ground. After all, neither the US or China wants to see a further slowing of their respective economies - President Xi’s grip on power isn’t what it used to be, and President Trump has an election to win next year.

But of course, these are not normal times. Over the weekend, President Trump, presumably in an attempt to leverage his bargaining power, abruptly announced his decision to slap 10 per cent tariffs on the remaining $US300 billion in Chinese imports, a move that essentially ended the current round of talks. And in response yesterday, China announced countermeasures that included a devaluation of its currency (the yuan), along with a halt to grain imports. According to one Wall St pundit, on a scale of 1 to 10, China’s response was an 11.

And for good measure, President Trump formally labeled China a ‘currency manipulator’ this morning, hence the continued market sell-off, along with the usual spike in gold.

On the face of it, it would seem that any hope of the US and China striking a trade deal in the near future is now well and truly off the table. This matters, as about half of the bounce in local and global shares since January this year was based on the assumption that, sooner or later, both sides would finally get their act together. So this could get worse before it gets any better.

But all too often, discomfort precedes victory. My instinct is that a deal will eventually be made (because they simply must), and what we may actually be witnessing are the final, angry, rough and tumble, face-saving stages (for domestic consumption) of an eventual trade deal. As with most compromises, neither side will be delighted with the final outcome, and no doubt Trump will declare himself the ‘winner’, but a deal will be made. Polyannaish, perhaps. But anything less than a calming, confidence inducing trade agreement would virtually guarantee both political and economic suicide, and both sides know it. This isn’t over by a long shot. Hang in there.

Rick Maggi, CFP