Investors and analysts aren’t particularly enamored with Donald Trump’s ongoing effort to prove something (although it’s not entirely clear what) to the world about his willingness to engage in trade brinksmanship until global equity markets take away his policy keys by plunging into an outright bear market.
Overnight, Trump of course ratcheted things up another notch by instructing the USTR to look into additional tariffs on China in connection with the 301 probe. Hilariously, Trump seemed taken aback that Beijing responded.
“Rather than remedy its misconduct, China has chosen to harm our farmers and manufacturers,” Trump complained, in a Thursday night statement.
Do note that this is exactly what bullies do. They lash out at people and then when they get hit, they claim it’s “not fair”. “In light of China’s unfair retaliation, I have instructed the USTR to consider whether $100 billion of additional tariffs would be appropriate under section 301 and, if so, to identify the products upon which to impose such tariffs,” he continued.
He’s probably feeling emboldened by the fact that U.S. equities shook off the China retaliation on Wednesday and have risen for three straight sessions despite getting off to their worst start to any Q2 since the Great Depression on Monday.
On imagines the President was aghast at the idea that China would target his base with their own tariffs. More specifically, his pride was likely hurt when farmers lashed out at him over the soybean boondoggle. As a reminder, this is all about politics. Trump wants to be able to point to his “tough” stance on China to bolster the GOP ahead of the midterms and as Bloomberg wrote on Wednesday, “[China’s] levies appear to be targeted at states, particularly in the Midwest, where Trump’s support is strongest, but, crucially, many of these states also have pivotal Senate and gubernatorial races in November [and] the economic blow from new tariffs could upend many of these races, potentially shifting control of statehouses and the U.S. Senate to Democrats.”
And so, Trump will take things up another notch and see if the market will let him do it. As noted here at the outset, analysts and investors more generally are getting sick of him.
“It’s becoming childish,” AMP Capital Investors Nader Naeimi told Bloomberg on Friday, adding that “at some point investors will say enough is enough, there’s just too much political volatility now.”
Right. And remember that all of this comes as Trump continues to lash out at Amazon on a daily basis. Here’s what I wrote a couple of days about about the political volatility:
As usual, the good news here is that two-way markets are back. There’s a sense in which what we’re seeing in 2018 is more “normal” than what we saw in 2017 when the market’s unshakable faith in “Goldilocks” (synchronous global growth and still-subdued inflation) effectively meant short vol. in all its various manifestations was the only viable “strategy.”
On the other hand, the bad news is that this is playing out against an exceptionally fraught political backdrop and indeed it seems as though markets have become almost completely beholden to politics over the past four weeks. Ultimately, that will spell trouble if the fundamentals are relegated to the backburner for too long.
“The reality is that the fundamental backdrop for markets hasn’t changed,” JPMorgan Asset Management’s Kerry Craig told Bloomberg for the same piece linked above. “The noise is distracting when nothing else is happening.”
Indeed it is, Kerry. And that could be because, as Barclays warned weeks ago, an all-out trade war could end up negating the entire fiscal tailwind from the tax cuts for S&P EPS.
“We estimate that an across the board tariff of 10% on all U.S. imports and exports would decrease 2018 EPS for S&P500 by ~11% and thus completely offset the positive fiscal stimulus from tax reform,” the bank wrote late last month. Here’s the breakdown using their assumptions:
For simplicity we provide estimates based on a uniform 10% tariff on U.S. exports (by U.S. trade partners) and all U.S. imports (by U.S. in retaliation). The results can then be easily scaled for different tariff assumptions. Under these assumptions we find that trade tariffs will hurt the S&P 500 2018E EPS by ~11.0% (Figure 4). This compares with our estimate of a ~7.3% positive impact of fiscal stimulus from tax reform. Thus an all-out “trade war” could potentially offset the positive impact of fiscal stimulus from tax reform.
So make of all that what you will, but just note that there will be a breaking point for markets when it comes to Trump, because every time someone says “well, he doesn’t really mean it” or “well, he’s reversed course on things before” or “well, surely he understands how catastrophic this would be”, he does something else egregious the very next fucking day.
Remember, he’s going to run this country like one of his businesses…