Markets started the new quarter on the back foot with news of Chinese tariffs on US imports, in a tit-for-tat retaliation for the previously announced US tariffs on Chinese imports, notably steel and aluminium. Whilst it was inevitable that China would retaliate, the news represents an escalation in global trade tensions and in turn, the potential for a full blown trade war. Beijing proposed tariffs on $50billion of US imports, exactly matching the previously proposed $50billion of Chinese imports to the US that could be subject to import tariffs. The fall in US Government bond yields, following a prior decisive move higher, suggests markets feared a poor outcome.
The sell-off in US technology stocks also continued at the start of the week, with the tech-dominated Nasdaq Index entering correction territory, having fallen more than 10 percent from last month’s record high. This has forced many investors to question their strategies that involve purchasing stocks that have gone up the most, in a bet on their ongoing strength. It could mark the beginning of the reversal of momentum stocks outperforming value, with companies sitting in the latter camp enjoying some relative outperformance this week. This was aided by the US President again taking a swipe at Amazon, tweeting that the domestic retail environment was “not a level playing field”, owing to the tax treatment the company receives, together with the US Post Office effectively subsidising the company’s operations.
Having taken the credit for much of the strength in equity markets since his inauguration, Trump may not be able to do the same this year. As China moves towards more of a consumption led economy, Trump’s protectionist approach could easily backfire. However, Trump’s bark is usually intentionally worse than his bite. Indeed, Trump’s new economic adviser, Larry Kudlow commented this week that “nothing concrete has actually happened” in relation to the proposed tariffs, adding that “these are just the first proposal. I doubt if there’ll be any concrete actions for several months”. Wilbur Ross, the US Commerce Secretary, supported this view by stating that this stand-off with China could still end in an agreement, adding that “even shooting wars end with negotiations”. The US President has a knack of bouncing back, as do equity markets and the first quarter earnings season, which is fast approaching, is likely to be strong at a time when equity valuations are now less demanding. The new quarter and tax year has begun against a volatile backdrop, but now does not feel like a time for panic.