We’ve been expecting this and it finally happened: China retaliated tit-for-tat with a 125% tariff hike on US goods. This is not what we should focus on though as it’s now effectively a trade embargo between the two countries.
The key line was China saying that it will ignore any further US hike because it will be just a numbers game which has no practical economic significance. This is basically what Trump said in his press conference following the 125% hike on China. We reached the peak in escalations.
Trading wise, the downside in the stock market is now kind of “limited”, and by limited I’m not saying the market can’t go lower, but risk/reward wise, I would start looking in the opposite direction.
This is also something you can “feel” from the market’s reaction. If you recall, the first retaliation triggered an aggressive selloff. The second retaliation caused just some losses that were later recovered. And now, with this third retaliation, the market is holding pretty well despite some selling.
So, we’ve gone from big moves to small ones. The market might now be looking forward to general de-escalation. The problem is that Trump will need to swallow his pride and make the first step because China has the upper hand at the moment.
He might sell it as him being superior and negotiating for the greater good because he cares about doing the right thing for the world and what not, but he is the one that will need to act first because China clearly isn’t going to do so (and it shouldn’t since it hasn’t started the trade war in the first place).
I know it’s hard to imaging this, but if Trump really cares about markets (and he does as we found out with the bond market selloff), then he must act because his “political capital” can’t save him for long.
This article was written by Giuseppe Dellamotta at www.forexlive.com.