Week In Review 5.10.2019

A sharp escalation in trade tensions between the U.S. and China resulted in a global equity market selloff. For the S&P 500, it was the worst week since December. The selling was triggered by an announcement from President Trump that the U.S. was prepared to increase tariffs on Chinese goods in response to what the administration said was an attempt by China to backtrack on substantial commitments it had made during recent trade talks. Those commitments were central to resolving core concerns of the U.S. regarding forced technology transfers, and theft of intellectual property and trade secrets. The news caught markets off guard and dashed hopes that an official announcement about a trade deal might be imminent.

According to China’s lead negotiator, the threat of higher tariffs did not constitute a deal breaker, in fact “ Quite the opposite, I think small setbacks are normal and inevitable during the negotiations of both countries”. However, he noted that despite reaching “mutual understanding” on a number of issues, there were also differences regarding “significant issues of principle.” On those he said, China “cannot make concessions on such issues of principle.” Whether or not that means talks have reached an impasse remains to be seen. Ultimately we expect a deal will be completed. However, the events of the week revealed something we have been cautioning about recently- that following the first quarter, investors appeared to be too complacent about trade talks, effectively treating a successful outcome as a foregone conclusion.

While tariffs on $200B of Chinese goods did increase on Friday, from 10% to 25%, the increase did not effect imports already in transit. Given the pace of seaborne container ships, it will be approximately 2-3 weeks before the tariffs actually kick-in, providing investors with some hope that a resolution may be reached before then.