The markets have gotten off to a sluggish start on Monday with traders seemingly held hostage by the widely anticipated announcement of additional tariffs on China. This round of tariffs feels a little different than the others. Perhaps investors have grown accustomed to the event. Perhaps investors have already learned to hedge away the risk generally accompanied by the event. Whatever the reason, it seems investors seem unwilling to commit on either side of the market until they see the details.
According to The Wall Street Journal, citing individuals familiar with the matter that President Trump is planning to impose a fresh round of tariffs targeting about $200 billion in Chinese goods. So the announcement should come as no surprise to investors. Therefore, we have to conclude the news has been priced into the market.
Assuming that investors have priced in the worst case scenario or the possibility of 25% tariffs, an amount less than that figure would be a surprise. The Trump administration could come in as low as 10%. A low-ball number has the potential of striking a bullish chord for gold and stock index traders.
If the Trump administration’s latest tariffs come in near the low of the range then look for the dollar to weaken. This should be supportive for gold prices. Furthermore, it is likely to increased demand for U.S. stocks.
With the move, Trump is trying to pressure Beijing ahead of planned high-level discussions and is intended to provide the U.S. leverage in talks over China’s alleged practice of demanding American companies turn over technology in order to do business in the country, the Journal reported.
China’s Retaliatory Moves
It has been shown that China can’t retaliate the same way as the U.S. and with the same size. They just don’t import as many goods from the U.S. as the U.S. does from China. However, China could hit the U.S. in a different way. It could restrict the export of goods, raw materials and components core to U.S. manufacturing supply chains. China is a key supplier of minor metals and rare earths used in consumer electronics and other goods.
China could also retaliate by increasing customs and regulatory scrutiny for U.S. products being brought into the country. Furthermore, Beijing may also decline to participate in the proposed trade talks with Washington later this month. This could then lead to a “Cold Trade War”. The lack of communication between the U.S. and China would create uncertainty and uncertainty would be bearish for stocks.
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According to The Wall Street Journal, one senior Chinese advisory official said China would not negotiate “with a gun pointed to its head”. That sounds like a sensationalistic statement. However, it actually signals a major escalation in the trade crisis because in April, a similar official said China would not conduct talks “under these conditions”.
In the game of Trade Poker that could be an important “tell”. In other words, perhaps the change in the phrase means China is getting nervous.
This article was originally posted on FX Empire
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