Punishing Chinese tariffs send another jolt of deep pessimism through markets

The feared escalation of the trade war is playing out and it’s sent another jolt of deep pessimism through markets. Trump continues to act as though trade is his plaything, and he’s wound up the equity rollercoaster for another plunge downwards.  With no last-minute reprieve being snuck in before the midnight deadline, Trump’s punishing 104% tariffs on Chinese goods have come into effect.  As a result, indices around the globe are suffering from another whipsaw in sentiment. The large rebound on Wall Street evaporated in a matter of hours, with stocks falling deeper into the red.  There’s been a fresh wave of selling across indices in Asia and Europe as investors mull the punishing repercussions.

 For China, so highly reliant on exports to power the economy, this will hurt, as its goods become uncompetitive in the vast US market. But its hugely painful for US companies, reliant on cheaper Chinese goods and parts, and American consumers will ultimately bear the cost, with prices set to rise across a huge array of goods, from toys and clothes to phones and gaming consoles. This is in addition to the price increases coming in for cars, as foreign made vehicles become so much more expensive due to 25% tariffs on imports.

.The world’s largest and second largest economies are now locked in a trade war, and neither nation seems willing to back down. Trump appears to have cracked open a door, saying he will negotiate, but China will not want to lose face and compromise. There’s also a queue building up for talks with the US as countries bang on the door of the White House, seeking respite from tariffs. This offers glimmers of hope that many compromises will eventually be reached, but unpicking the knot of tariffs will take time.

 As the world waits to find out which side might blink first, there’s renewed sentiment for gold as place of safety amid market turmoil, with the precious metal climbing back up after recent losses. But the allure of US Treasuries as a safe-haven assets appears tarnished right now. Volatility has hit the bond markets, as investors appear to be starting to pull money out to brace for what could be to come next. Government bonds have been more in demand as investors sought safety, but the moves suggest that some positions are being exited to cover losses elsewhere in the markets and that liquidity is being squeezed. The sharp move upwards in US Treasuries, comes even though bets that the Federal Reserve will cut interest rates have increased. This would usually put further downwards pressure on yields, but this hasn’t happened. Yields on UK gilts have also risen but less sharply and are below the levels seen in January. Worries about stagflation are also rising, with a raft of US goods set to rise in prices while recessionary risks are also marching upwards.

 Oil prices have slid further as traders brace for a big hit to global growth and demand for energy. Brent Crude futures have fallen by more than 2% to $61 dollars a barrel. It’s trading at levels not seen since 2021, as the world was still in the grip of the pandemic. If the huge American market, closes as a land of opportunity for Chinese firms, factories will be forced to slow production. Authorities would like Chinese consumers to take up the slack, but they are still reeling from a property crisis, and now trade turmoil may be more likely to induce fresh caution.

 These big swings on the market don’t look like they will disappear overnight, given the high state of nervousness. There may be an impulse to switch and ditch stocks and try and buy on big dips. But this is an era when investors would be wise to keep their eye on long term horizons. It’s time in the market, not timing the market which is often the best investment strategy.