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Indices struggle as trade wars ramp up

Stocks have been hit again as China introduces tariffs, intensifying the conflict with the US. 

Chinese flag
Source: Bloomberg

Trade wars represent perhaps the biggest threat to a recovery in market sentiment. For some time it had seemed that the problem would be resolved, but the Chinese response (placing new tariffs on soybeans and on such high quality products as aircraft and electronics) has come as rather a surprise.

China’s State Council, the equivalent of the US cabinet, said that the tariffs will hit 106 products totalling $50 billion of Chinese imports from the US. This is very much a tit-for-tat move, but crucially these tariffs will not take effect straight away. Instead, they will wait until the US has implemented its own tariffs. Thus we should perhaps see this as a threat rather than an actual decision, a negotiating move that shows that China will not be pushed around.

Chinese tariffs will hurt consumers at home as well as US farmers, since soybeans are a vital part of pork production. Higher input costs will increase food prices, something that will make the Chinese government very nervous.

Turning to electronics, China’s move will have domestic repercussions. Firms such as Lenovo import US components, so their goods will become less competitive as prices rise. Chinese companies can look for foreign sources, but in the end most semiconductors have to come from the US. For aircraft, China has done well out of the Boeing/Airbus competition, and shifting too far away from Boeing and too close to Airbus makes China more dependent on the European firm, and reduces its leverage over Airbus in its attempts to get the company to invest more in China production and in the transfer of more technology to China.

Although we have moved into a new phase of this war of words, the actual imposition of tariffs is yet to come. We may avoid a further falling out between the two economies. Having unsheathed its sword, China may now move to the negotiating table.

There has been fresh downside for indices following the news from China. Its decision to include electronics and other products comes as a bit of a shock, but once this wears off markets may recover. The S&P 500 is back below its 200-day simple moving average (SMA) at 2597, but has not yet returned to the early February lows at 2531. A loss of this level would be the worrying development, as momentum would take over – 2491 and then 2453 might well be the next areas to watch for support.

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