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Chart of the Day / Why Markets Were able to Shrug off Trade War Fears

Why Markets Were able to Shrug off Trade War Fears

September 25, 2018

A severe lack of market reaction to trade war tension has taken many by surprise.

After President Trump announced he was imposing tariffs on an additional $200 billion worth of Chinese goods, China retaliated with tariffs on an extra $60 billion worth of U.S. exports.

“China does not want a trade war, but it is not afraid of one and will fight one if necessary,” Beijing said. “We have a highly resilient economy, an enormous market, and the hard-working, talented and united Chinese people. We also have the support of all countries in the world that reject protectionism, unilateralism and hegemony.”

To many, rising tensions should have crashed U.S. markets.

Instead, the market shrugged, and went about its day.  In fact, the Dow Jones is now challenging a previous high set in the early days of 2018.

One reason for that are actions from the Trump Administration.

Analysts note the Trump Administration’s $1.5 billion tax cut and increased government spending has done a great job of shielding us from trade tensions.  And, with GDP up to 4.2%, we’re living in the second longest period of economic expansion since World War II.

Another reason is the fact that corporate profits in the U.S. are rising.

They were up 20% in the first two quarters of 2018, as compared to last year.

“I think the bottom line is that the earnings have continued to accelerate,” said Marc Pouey, a strategist at Bank of America Merrill Lynch, as quoted by The New York Times. “If the trade tension were to dissipate, it would help sentiment, but this market is being held up by fundamentals, which are very good.”

Meanwhile, China’s Shanghai Composite has been crumbling.

Since June 2018, the market has fallen from nearly 3,150 to just below 2,650.

Chinese stocks plummeted this year on concerns about trade war and China’s slowing domestic economy.  And while some investors may excessive pessimism has created a buying opportunity, we’re not so sure yet.

At the same time, some investors worry that the bigger casualty from the trade war will be the renminbi, if Beijing decides to use the exchange rate as a weapon to counteract US tariffs.  If China were to weaken the currency relative to the U.S. dollar, making products cheaper.

Tariffs could also knock off about 0.7% from China’s GDP.