China retaliates on tariffs

Wall Street Journal wrote:China Tariffs Threaten U.S. Cars, Planes and Soy in Response to Trump
Beijing hits back at U.S. with tariffs on $50 billion of goods

By Lingling Wei and  Yoko Kubota
April 4, 2018

BEIJING—China stepped up its trade fight with the U.S., retaliating against proposed tariffs on Chinese goods by targeting high-value American exports, from airplanes to soybeans, in a tactic Beijing officials say is meant to secure a truce.

Hours after the Trump administration unveiled plans to impose tariffs of 25% on Chinese products worth $50 billion, China’s State Council announced Wednesday that it would levy penalties of the same rate on U.S. goods of a similar value.

Reuters News wrote:China retaliates, slaps duties on U.S. soybeans, planes; markets skid
Reuters Staff

NEW YORK (Reuters) - China hit back quickly on Wednesday against the Trump administration’s plans to impose tariffs on $50 billion in Chinese goods, retaliating with a list of similar duties on key U.S. imports including soybeans, planes, cars, beef and chemicals.

COMMENTS:
JOHN STOLTZFUS, CHIEF INVESTMENT STRATEGIST, OPPENHEIMER ASSET MANAGEMENT, NEW YORK

“At this point, when you look at the broad nature of the decline, it shows elements of a ‘tariff tantrum’ happening in the market. There’s not a trade war going on at this point. Both sides are firing shots across the bow. They’re responding to each other with heavy-handed tactics. It’s not so deep as to cause the reaction the market is taking right now. It’s overreacting, we would think. For volatility players, it’s just what they love…For intermediate and long-term investors, it’s a greater opportunity to build a shopping list for stocks to pick up that are cheaper now.”

“We recently reduced materials to ‘market perform.’ We reduced health care from ‘overweight’ to ‘market weight.’ We increased our weighting in financials exposed to the domestic economy. Aside from that, we’re emphasizing emerging over developed international markets. We’ve overweight U.S. equities over international (equities). We’re moderately exposed to fixed income. And we’ve raised cash at this time, to 5 percent from 2, 2-1/2 percent. We didn’t just do that because of this. We’ve already seen the market soften some. (Today) should not be taken separately from the downside of the market we’ve seen since March.”

BRAD MCMILLAN, CHIEF INVESTMENT OFFICER, COMMONWEALTH FINANCIAL NETWORK, WALTHAM, MASSACHUSETTS

“I don’t think the market has factored in the ultimate prospect of (a further escalation) happening. Right now, it’s showing a rational response, but if there’s a trade war, the damage could be significantly worse. The chances of that happening are still not high. There are a lot of moving parts from a macro perspective. Valuations still have a lot of confidences built in. If you subtract the confidence in increasing growth and economic prospects, valuations will contract. Another 10 percent decline is not out of the question. It might even get worse.”

“We’re paying attention to the moving average. We’ve seen it break below that, and we’ve seen it recover. Right now, (China’s proposed tariffs) are more about negotiation and posturing than any policy actions that have been taken. Right now, we’re still in a wait-and-see mode. That said, the chances of a bad outcome are materially higher today than, say, yesterday.”

“Over the past couple of years, you’ve seen growth outperform value. In difficult times, value is the place you move to, and we’re starting to see signs of that…In international markets, the danger is widespread, but international stocks are less expensive than U.S. stocks, so international exposure is an area to look at. More defensive sectors – utilities, real estate investment trusts – are typical flight-to-safety areas.”

“The question is, ‘Why isn’t the market falling further?’ It wouldn’t be unreasonable to see worse than what we’re seeing. It shows that there’s still some potential for this situation to be resolved, and then we’ll see the market resume an upward trend. Economic growth is solid, corporate earnings are solid. Yes, we’ve seen the market take a real hit. Yes, it could get worse. But we’re not ready to panic just yet.”

“China very explicitly made the proposed tariff response a political spear aimed at Trump’s heartland. To the extent that it does get worse, it would disproportionately affect the red states. It could have a material impact (on the midterm elections).”

STEVEN ENGLANDER, HEARD OF RESEARCH AND STRATEGY, RAFIKI CAPITAL, NEW YORK:

“If you look at equities right now, the market is seeing very few scenarios where they go up as a consequence of these trade actions. That seems obvious. However, if you look at the FX market, the tariffs doesn’t mean the U.S. wins or loses or if there is a right or a wrong.

“The market doesn’t see many plausible stories in which equity markets go up because of this, but you can tell plausible stories for dollar moving up or down.

“I think the market sees that the shift in probabilities as being overwhelmingly skewed to the downside for stocks, but for FX you don’t know. You cannot say for sure of dollar positive or negative.

“Now, is the equity market over-reacting? The S&P market cap is about $23 trillion. So 1.3 percent drop is about $300 billion, give or take. You put a tariff on 20 percent on $60 billion of goods, that amounts to about $12 billion.

“The market has discounted 25 years of tariffs. You can ask the question of whether the market has exaggerated the trade? But keep in mind the nature of the outcome of tariffs is rarely lasting that long or extending that far.

“There is a scenario that is dollar positive in that maybe the current account deficit is reduced or the Fed raises rates. Normally that would be seen as dollar positive. But there is a dollar negative aspect in that perhaps the tariffs apply to some necessary components of the U.S. economy, and slow it down. You can tell stories, but the stories that you can tell make a lot more sense about being worried about equities but less so as a basis for coming down solid on how the dollar behaves.”

JASON WARE, CHIEF INVESTMENT OFFICER, ALBION FINANCIAL GROUP, SALT LAKE CITY:

“What drives the tape over the short run? It’s sentiment. If trade tensions ease, one could argue that a bounce is in order. The 200 day moving average is a technical level that so many people watch, that it becomes a self-fulfilling prophecy. If you slice through it, you get more sell orders and the algorithms and machine trading kicks in.”

BRUCE MCCAIN, CHIEF INVESTMENT STRATEGIST AT KEY PRIVATE BANK IN CLEVELAND, OHIO

“The problem with this is it’s coming at a time when we are trying to put an end to a fairly normal correction (in stocks). So I think there is the potential that this drives it a little bit deeper as we do that, but our philosophy has been as long as there is not major economic deterioration, whatever you see in terms of a short-term emotional reaction in a market correction will tend to play itself out and then ultimately the longer-term trend will reassert itself...”

“The market hasn’t wanted to finish the correction. It has avoided sell-offs except on some really bad news. If anything this may give it a push over the edge so we can get the corrective forces to play out and then stabilize things and be prepared to really assess what the longer-term prospects look like.”

“(The midterms are) clearly an overhang that we are going to have to face, but I think most investors assume there is going to be some loss for the Republicans as we go through the midterms and then we will see what ultimately happens.”

“Going into this, Trump had a number of things that he wanted to achieve as part of his agenda, and one of them was trade issues. The interesting thing is virtually everybody agrees there are some things China has been doing that they shouldn’t be doing. Whether or not he is taking the right approach to it or not we will see in the coming months, but if he actually can come out of this with some major concessions from China that deal with some of the intellectual property rights and some of the other things that have been problematic, it will ultimately I would think leave him in better shape for the midterms then it would be if he doesn’t go through it now.”

JIM VOGEL, INTEREST RATE STRATEGIST, FTN FINANCIAL, MEMPHIS, TENNESSEE

“Fixed income has been ahead of equities on this story since it broke in March and equities did their best to ignore it. People aren’t used to even asking the questions much less putting pencil to paper to try to develop even a preliminary answer. We’re trading some of this stuff in four to eight hour increments and changing our minds collectively as to what it really is going to mean. In theory trade breakdowns don’t impact the economy quickly, instead they are a damper on forward activity, but the stock market’s acting like things are going to come to a screeching halt.”

“Because tariffs are an underlying part of the new tension, the market will eventually shift far more attention to the potential for a floor under inflation even if the economy sputters because we are hurting certain select industries.”

MARC CHANDLER, CHIEF GLOBAL CURRENCY STRATEGIST, BROWN BROTHERS HARRIMAN & CO, NEW YORK

“All that has happened in the past 24 hours is that the details of sanctions - which goods - have been announced. The real escalation is if the U.S. retaliates again.”


“The selloff in the U.S. stock market that began in late January into early February began before the trade war talk started. Some investors might want to come get back involved – the S&P 500 is below the 200-day moving average – but I think these trade issues keep them off-balance.”

“I don’t think we’re in a trade war. I think of a trade war as an escalation ladder, and these moves are still low rungs on the ladder. Rungs we have already explored with other countries including allies like Canada. There’s almost always constant tension – over lumber, dairy, pipelines, autos – and we take each other to the WTO. And there are tariffs. And no one thinks the U.S. and Canada are in a trade war. The militaristic concepts we’re invoking – currency war, trade war, a new Cold War – are jumping rungs on the ladder.”

JACK ABLIN, CHIEF INVESTMENT OFFICER AT CRESSET WEALTH IN CHICAGO

“Now they are coming back targeting our largest exports. Futures seem to be eroding. Tariffs by themselves and an escalating trade war would certainly have deleterious effects on just about everything. Stripping it away, at least we are not in a frothy market situation, something where there is some vulnerability there. There are going to be a lot of companies not affected by tariffs, probably, and those earnings are going to be pretty good.

“One of the things is that analysts are actually raising their revenue and profit forecasts going into the (earnings) season, which is really kind of a reversal of what we have seen for years. If you take those numbers and project out for four quarters, I argue the market is about 7.5 percent undervalued relative to the next four quarter earnings if you just look at the cumulative growth.

“Obviously we need kind of a quiet period on these headlines and we need to focus on what is ultimately important and that is earnings. So I am hopeful over the next couple of weeks that earnings will be that shiny object that everyone can focus on.”

ADAM SARHAN, CHIEF EXECUTIVE OF 50 PARK INVESTMENTS IN NEW YORK

“The market is erring on the side of caution. The level of uncertainty has definitely surged. When you see China retaliate stronger than the U.S. that’s a very strong signal that they mean business.”

“Everybody knew they were going to retaliate. The question was how strong of a retaliation. Today’s move clearly shows that they mean business.”

“Today we’re close to testing important levels of support. If the market takes out February’s low, if all three indexes break below and close below that low that’s going to significantly change the landscape. It’ll show the intermediate term trend will have shifted to a bearish trend from a sideways trend.”

“Right now we’re clearly in correction territory. For the correction to end we have to get some certainty on this trade situation. If it escalates we’re going into a bear market. If it de-escalated the market’s moving higher. The only thing that matters now is certainty.”

“You don’t have to be fully invested. If this gets ugly and we get another 2008 style bear market everything goes down. If that happens, the safest place to be would be to be out of the market.”

“The market is very news dependent and a positive headline or a positive tweet could significantly change the dynamic. The market right now is desperate for clarity. Until we get that clarity we’ll have sideways to down action.”

If the U.S. responds to China or if more countries are dragged in he said: “This could very quickly get out of hand and cause a global recession. For now a defensive stance is warranted.”

RICHARD BENSON, CO-HEAD OF PORTFOLIO INVESTMENTS, MILLENNIUM GLOBAL INVESTMENT, LONDON:

“The impact on (the) financial market has not been that significant. So this has not really affected our portfolio allocation. We’ve done bits and pieces but there has been no massive shift. The net effect on U.S. GDP is just 0.3 percent of GDP, which is minimal. It could worsen, sure. If that materializes, then we could see a more pronounced sell-off in stocks. So we’re waiting for the next moves from both the U.S. and China.”

MARKET REACTION:
STOCKS: Stocks were sharply lower, with the S&P opening down 1.3 percent. BONDS: Benchmark 10-year note prices gained 5/32 in price to yield 2.726 percent, down from 2.783 percent on Tuesday.

https://www.reuters.com/article/us-usa-trade-china-instant-view/china-retaliates-slaps-duties-on-u-s-soybeans-planes-markets-skid-idUSKCN1HB1ZS