So much for the optimism that followed the WSJ report that the Trump administration is willing to offer China an olive branch in trade talks in hopes of avoiding further escalation (and which pushed the S&P back over 2,900).
Moments ago Bloomberg reported that President Trump has instructed aides on Thursday to proceed with tariffs on about $200 billion more in Chinese products despite Steven Mnuchin’s attempt to restart talks with Beijing to resolve the trade war.
The announcement of the new round of tariffs – which had been anticipated by most as a late September event – had been delayed as the administration considers revisions based on concerns raised in public comments, Bloomberg sources said.
On Thursday Trump met with his top trade advisers to discuss the China tariffs, including Treasury Secretary Steven Mnuchin, Commerce Secretary Wilbur Ross and U.S. Trade Representative Robert Lighthizer. And as we said on Wednesday, Mnuchin has been the leading voice in the recent overture to the Chinese to re-start trade talks.
As a reminder, before his Thursday meeting, Trump boasted on Twitter that he has the upper hand in the trade feud with Beijing and feels “no pressure” to resolve the dispute.
The Wall Street Journal has it wrong, we are under no pressure to make a deal with China, they are under pressure to make a deal with us. Our markets are surging, theirs are collapsing. We will soon be taking in Billions in Tariffs & making products at home. If we meet, we meet?
— Donald J. Trump (@realDonaldTrump) September 13, 2018
His comment prompted renewed “cautious optimism” among investors over the U.S. government’s proposal for another round of talks with Beijing. Disclosure on Wednesday that the U.S. sought to renew the talks rallied U.S. stocks and emerging-market assets. So much for that…
Meanwhile, with regard to Trump’s threat of $267 billion in additional Chinese tariffs, Bloomberg notes that the administration hasn’t yet published a list for public comment, although after China retaliates in tit-for-tat fashion to the $200BN in tariffs, it is likely that Trump will next tax virtually all Chinese imports into the US.
It is not clear why traders, algos and so-called experts were quick to assume that a deal was finally imminent: after all, repeatedly efforts to end the dispute had fizzled so far, for one simple reason: Trump is convinced that he is winning the trade war. Officials from both countries have met four times for formal talks, most recently in August, when Treasury’s undersecretary for international affairs, David Malpass, led discussions in Washington with Chinese Vice Minister Wang Shouwen. There were no breakthroughs because Trump refused to relent on any outstanding issue.
Commenting on the latest “news”, Bloomberg’s Ye Xie writes that while Trump is sending Steven Mnuchin out as a good cop to keep the dialogue with Beijing going, “he himself is playing the bad cop by moving to imposing additional tariffs. Barring someone stealing documents from his desk, it’s highly likely that he will go ahead and pull the trigger.”
While similar tactics seem to have worked on Europe and Mexico, it’s hard to imagine that China will yield to such pressure. As we argued yesterday, S&P 500 is more vulnerable than EM to the escalation of trade tension at this point because analysts have yet to revise down earnings growth.
In kneejerk reaction to the news, US stocks, and the Chinese yuan tumbled having priced in a far more favorable outcome in recent days.
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Some more context here:
Earlier this week, Goldman became the latest to weigh in on the topic of trade war, highlighting the potential danger to Corporate America if a full-blown trade war erupts, one which now appears inevitable. And in a radical departure from his traditional optimism, Goldman chief strategist David Kostin went so far as now calling for a bear market, with the S&P dropping 25%, resulting in over $6 trillion in market cap losses, should the U.S. impose 10% tariffs on all imports.
In a sensitivity analysis evaluating a baseline case, as well as a moderate and severe trade war, Kostin predicts that a 25% tariff imposed just on Chinese goods would wipe out growth for S&P 500 companies next year, keeping S&P500 EPS flat at $159. In the extreme case – the one which Barclays evaluated back in June – and in which the U.S. imposed 10% tariffs on all global imports, earnings would drop 10% as costs went up for Americans while crushing corporate profits.
In addition to hammering earnings, Goldman also expects that the PE multiple of the S&P would also contract, dropping from the current 17x to 15x, and resulting in an S&P plunge of 25% from the current 2,888 to 2,200, which would lead to a bear market and wipe out over $6 trillion in market capitalization.