KINGSTON, NY, 20 JUNE 2018—President Trump's threat to launch a $200 billion tariff attack on China if they refuse to "change its practices," we conclude, personifies his more-talk-than-action, "go to the end" then "back-peddle" negotiation style.
For example, with bluster and bravado, last year Mr. Trump threatened to "totally destroy" North Korea, calling its leader, Kim Jong Un a "maniac," and "madman," only to praise him as "very open" and a "very honorable" negotiator following their meeting this month in Singapore.
We contend Trump is deploying his "Art of the Deal" strategy with China. They have a $375 billion merchandise trade surplus with the United States, and will negotiate rather than kill off its lucrative export money stream.
And while China has responded to Trump's $50 billion tariff with tit-for-tat measures, the economic impact of those tariffs on China is modest, shaving some two-tenths of a percentage point off its gross domestic product after two years.
But as the political and media world stir hysteria of impending trade war doom, we are tracking a trio of essential developing trends that pose substantial threats to global market stability: Rising interest rates, Emerging Market meltdowns and oil price spikes.
As long noted, stocks are overvalued and overleveraged by historical standards. What has boosted them since the end of the Great Recession are Quantitative Easing schemes and unprecedented negative/zero/low interest rate cheap-money flows which, in the U.S., continued following Trump's tax-cuts that have accelerated stock buybacks and merger and acquisition activity to record levels.
However, with the Federal Reserve signaling four rate hikes this year, we forecast the Trump Rally has peaked and will decelerate should rates aggressively rise.
On a global scale, rising U.S. interest rates have already hit both developed and EM currencies. Canada, Australia, Argentina, Turkey, Indonesia, South Africa, Mexico, Brazil, etc., are falling to one-year and all-time lows as the dollar rises to an 11-month high.
Moreover, as U.S. rates rise and the dollar strengthens, the cost burden to EMs to service their $7 trillion debt, much of it dollar denominated, significantly increases.
Further, should oil prices, which are dollar-based, continue to rise, EM and oil import-dependent economies and their equity markets will be driven dramatically lower.
TREND FORECAST: While global equities have declined as tariff rhetoric intensifies, we do not forecast impending trade wars. If trade wars were on the horizon, gold, the ultimate safe-haven asset and key indicator of geopolitical and socioeconomic unrest, would be spiking higher rather than slumping to a six-month low.