We are witnessing exactly the tit-for-tat response to the US tariffs that had been feared from the get go. Proposals targeting specific products and industries from both the US and China just brings us one step closer to a trade war. So far these are still just proposals, and we tend to still think the trade dispute will ultimately be fixed amicably within the consultation period, without tariffs. But markets, as they tend to do, are pricing in more than is currently known. There is still more room to the downside for equities.
Investors are second-guessing their initial belief that this can be wrapped up in a civilised way.
Asset classes most exposed to a trade war were hit by the worst selling. China’s announced tariffs of 25% on US imports of automobiles, chemicals, aircraft and US crops hurt shares in those industries. US industrial giants Caterpillar (NYSE:CAT) and Boeing (NYSE:BA) were worst hit when Wall Street opened.
A drop in US soybeans futures were one of the clearest market reactions. Copper prices sunk while mining company shares fell even more. Industrial metals could get directly tangled up in trade war with higher tariffs into China and a trade war would likely dampen economic growth, meaning less commodity demand. The price of oil, often a barometer for expected global demand, hit a 2-week low.
A jump in supermarket and defensive utility shares helped limit the damage of a global trade war on the FTSE 100. The Big 4 Supermarkets saw their smallest loss of market share in a four-week period since May 2011. The growth rate of Aldi and Lidl in the UK may have already topped. The discounters have carved out a niche in the UK grocery sector but their limited offering means they can only capture so much market share from the likes of Tesco (LON:TSCO).
UK construction and materials shares crumbled underneath data showing a weaker than expected Construction PMI. The ‘Beast from the East’ took its toll on building work in March so an April bounce-back seems likely.
WPP (LON:WPP) shares were down on news of an investigation into founder and CEO Martin Sorrell. Given the handsome pay cheques that have made Sorrell one of the highest paid FTSE executives, it is hard to fathom how he could have been misusing company funds. Investors clearly feel where there’s smoke there’s fire.