Trump’s latest trade salvo: How worried should markets be?

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Markets globally have fallen in the wake of U.S. President Trump lobbing his latest aggressive trade threats.

Trump launched plans to impose US$60 billion in tariffs against Chinese goods, while China announced retaliatory measures of around US$3 billion of U.S. imports if a resolution isn’t reached.

That sent markets tumbling: Singapore’s Straits Times Index lost as much as 2 percent by midday Friday, Japan’s Nikkei was down as much as 3.5 percent and Hong Kong’s Hang Seng had fallen around 2.8 percent. That was in the wake of a nearly 3 percent fall in the Dow Jones Industrial Average on Thursday, with the S&P 500 off 2.5 percent and the Nasdaq down 2.4 percent. Futures at midday Singapore time suggested Wall Street would fall further later in the global day.

To be sure, Trump has a predictable history of making bombastic, extreme threats that he later retreats from. And reports that the administration was still developing the list of products to target even after the announcement was made suggest that nothing has been carved in stone. But at least one former adviser expected the administration to pursue the policy whole hog.

Some analysts had words of caution for investors who might be inclined to follow the market panic:

Wells Fargo Investment Institute said in a note dated Thursday that higher duties on targeted products may only be a small fraction of commerce between two countries or in the context of overall trade globally.

Limited impact on trade?

It noted that aerospace exports to China were less than 1 percent of total U.S. exports last year, so the U.S. economy wasn’t likely to face a big hit if China imposes retaliatory trade restrictions on aerospace imports.

But it added, “This does not minimize the potential for lost U.S. jobs or reduced corporate earnings.”

Wells Fargo said it expected the risks of a full-blown trade war were “contained,” dependent on the Trump administration’s actions, and it expected global economic growth to continue this year.

However, it said it would become more concerned if the largest trading economies began imposing tariffs on their largest trade categories, including autos and auto parts, electronics, petroleum products and machinery.

What do currencies say?

Kathy Lien, managing director for foreign-exchange strategy at BK Asset Management, said the potential trade war threats were “very dangerous.”

“The fears of a trade war are legitimate and have overshadowed central bank policy, causing weakness for almost every major currency pair,” she said in a note on Friday.

“The president’s actions have cost him the confidence of foreign and domestic investors who expressed their frustration by bailing out of U.S. stocks and risk assets,” she said.

The dollar index, which measures the greenback against a basket of currencies, tumbled from as high as 90.371 earlier this week to as low as 89.575 in Asian trade on Friday.

Will Australia take a hit?

Shane Oliver, head of investment strategy at AMP Capital, said in a note on Friday that the trade outlook wasn’t as dark as it appeared.

“It looks scary and the risk of a trade war has escalated, but it’s not necessarily on the way. Trump’s latest move was well-flagged (although the share markets didn’t seem to think so),” he said. “However, while it looks messy, there are grounds for optimism that an all-out trade war between the two countries will be avoided.”

Oliver also pointed to Trump’s usual, predictable “Art of the Deal” negotiating style, which means he’s likely to retreat ahead.

Oliver added that China’s planned retaliation may not come to fruition as well.

“It’s arguably in China’s interest to avoid retaliation and try to come off as the good guy,” Oliver said. “Despite what he says in his tweets, a full-blown trade war is not in Trump’s best interest either as it will mean higher prices in Walmart and hits to U.S. exports like Harleys, Jack Daniels, pork and fruit that will not go down well with his base. And he likes to see a higher, not lower, share market.”

But Oliver also expected that Australia could get caught in the cross-hairs, noting that 33 percent of his country’s exports go to China, mostly in the form of raw materials, with some of those turned into goods that make their way to the U.S.

“The impact on Australia may be less than feared if the U.S. tariffs, as flagged, focus on aerospace, IT and machinery,” he said, but added that Australia would need to help head off a trade war.

The ASX 200 was down around 2 percent by midday.