By Greg Valliere
Horizon's Chief Global Strategist
March 23, 2018
Trade War? More Smoke Than Fire
THE MEDIA LOVES AN EYE-CATCHING HEADLINE, so hype about a "trade war" is good for ratings and subscriptions. But yesterday's action strikes us as relatively mild, setting the stage for talks that could save face for all involved – especially for Donald Trump, who wants splashy victories but often retreats as the fine print emerges.
THE BEST EXAMPLE OF THIS is the steel tariffs he announced last month, which suddenly have been dropped for key American allies – the EU, Canada, Mexico, South Korea, Brazil, and Australia all got waivers yesterday. And the new tariffs on China will now enter a "consultation period," which may produce similar waivers.
FOR A "TRADE WAR," THE CHINESE REACTION WAS AWFULLY MILD: Beijing announced tariffs of $1 billion on U.S. exports. One billion? That's a rounding error, with modestly higher tariffs on U.S. shipments of fruits, wine, soybeans and pork. The Chinese undoubtedly know there will be negotiations on intellectual property rights and their high existing tariffs on U.S. goods, so their initial reaction was muted.
WHAT THE SKITTISH MARKETS SEEMINGLY SAID YESTERDAY was that the "smash mouth" U.S. approach was a shock that could lead to an escalating trade dispute that brings with it the threat of inflation, reduced economic growth and general uncertainty. We get that, and as usual the Wall Street Journal editorial page gets it mostly right this morning.
BUT THIS IS NOT A TRADE WAR, at least not yet. It's a dispute that had been telegraphed for the past several weeks; this should not have come as a surprise. The obvious issue is whether this is sufficient to end the bull market for equities. It may be a negative for certain companies like Boeing that might suffer if a real trade war erupts, but is it a negative for equities overall?
THE FUNDAMENTALS HAVEN'T CHANGED: The U.S. economy is on sound footing, likely to expand in the second quarter. Inflation – and inflation expectations – are still well contained. The labor market is red hot, and increased hiring will boost real disposable income. Corporate earnings are solid. Interest rates, as we predicted earlier this week, aren't a threat.
YES, THE ATMOSPHERICS HAVE CHANGED: Most world leaders are horrified by Trump, but he sure knows how to get their attention. This opening salvo in a trade dispute will now lead to negotiations as these leaders nervously attempt to calm the waters. Again, we think yesterday could have been worse; this is far from a "war." And it's possible – or maybe even likely – that the markets over-reacted.
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