Tariffs partially delayed

Thought of the day

by Chief Investment Office 14 Aug 2019

The US Trade Representative has announced a partial delay in the imposition of additional tariffs on Chinese imports. While final details have not been published, for around half of the approximately USD 300bn worth of goods, it appears that the 10% tariffs originally scheduled to be imposed on 1 September will be delayed until 15 December.

Markets reacted positively to the news, with the S&P 500 gaining 1.4% and 10-year US Treasury yields rising 4 basis points. However, this development does not greatly improve the outlook in our view.

  • Tuesday's announcement makes it clearer in our view that President Trump really intends to implement the tariffs first threatened in a tweet on 1 August. Rather than a negotiating tactic, the tweet was what it appeared to be: another escalation of the trade dispute.
  • President Trump said the delay was meant to protect consumers during the holiday shopping season, and tariffs on most consumer goods will be delayed. This does not change the fact that nearly all Chinese imports will likely be subject to tariffs by the end of the year. The recent discussions on trade have shown no signs of significant progress.
  • Trump's acknowledgement that the tariffs would hurt consumers might mean that he will be reluctant to raise the tariffs to 25% at a later date. However, with China already taking countermeasures and showing no signs of capitulating to US demands, we still see a substantial risk that the trade dispute will escalate further.

The current environment remains positive for equities, and low rates support carry trades, which help boost portfolio income. We recommend a tactical overweight to equities, with a regionally selective approach to manage risks and harness opportunities. We retain some countercyclical positions to manage downside risk.

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