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Investment Insights: The trade war reignites

Wade Balliet
Posted by Wade Balliet
Investment Strategy

This weekly report presents insights from our Global Investment Management team.

Stock markets tumbled today as the U.S.-China trade war reignited after representatives failed to reach an agreement last week.

The S&P 500 Index fell 2.41% on Monday, while exchanges around the world were in the red, according to Bloomberg data, after both sides announced a fresh round of tariffs.

Investors are flocking to safe haven assets as the volatility strikes stocks. The 10-year U.S. Treasury yield declined on the reports to 2.40% and has fallen almost 30 basis points since the beginning of the year. Gold, another asset that is considered resilient during times of market strife, climbed 1.03% today according to Bloomberg.

Investors had high hopes late last week as China’s Vice Premier Liu He and his delegation met with U.S. trade representatives, but a compromise could not be reached before President Trump’s deadline. Based on a report by Reuters, the key conflicts within the agreement were over China removing commitments to change its laws regarding intellectual property rights and forced technology transfers, and the complete removal of all existing tariffs between the two countries. As promised, the U.S. administration swiftly moved forward with boosting tariffs from 10 to 25% on $200 billion worth of Chinese goods after the erosion of talks on Friday. Despite a warning from Trump to not retaliate, China announced it would impose its own higher tariffs on Monday.

China’s finance ministry declared plans for a range of tariffs from 5 to 25% on over 5,000 U.S. products targeting approximately $60 billion of U.S. goods imported by China, which will take effect June 1. The ministry also stated that the tariffs were in response to “U.S. unilateralism and protectionism,” while expressing it hopes to get talks back on track. Trump has ordered trade representatives to begin reviewing plans for tariffs on the remaining $300 billion worth of goods imported from China. While officials have stated there are no longer any official trade discussions planned, White House Economic Advisor Larry Kudlow mentioned a “strong possibility” of President Trump meeting with Chinese President Xi Jinping at the G20 summit in late June.

Our team had already become wary of potential issues facing global economic growth and financial market fundamentals, but a continued battle between the world’s two largest economies could cause an even greater drag. A research note from Goldman Sachs economists provided substantiation that the costs of U.S. tariffs have actually fallen entirely on U.S. businesses and consumers, while spillover effects have caused U.S producers to charge noticeably higher prices. Further volatility may be on the horizon even if a prolonged trade war does not develop. We hope a resolution can be reached, but we aren’t holding our breath.

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Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. The information in this newsletter is for informational purposes only and is not intended to be investment advice or a recommendation. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.

Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

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