(Reuters) – U.S. President Donald Trump on Thursday moved to impose a 10% tariff on an additional $300 billion worth of Chinese imports starting Sept. 1, after U.S. and Chinese negotiators failed to kickstart trade talks between the world’s two largest economies.
* The new tariffs will hit a wide swath of consumer goods from cell phones to toys to computers
* The tariffs will be levied at 10% starting Sept. 1
* About $250 billion of imports from China are already subject to a 25% tariff
* IMF has warned that tariffs already in place will shave 0.2% off global economic output in 2020
* STOCKS: S&P 500 index turned sharply lower [.N]
* BONDS: Yields fell, with the 10-year Treasury yields dropping to the lowest since 2016 [US/]
* FOREX: The dollar index lost ground, led by a big surge in the Japanese yen
MOHAMED EL-ERIAN, CHIEF ECONOMIC ADVISER AT ALLIANZ, NEWPORT BEACH, CALIF.:
“The tariff escalation shouldn’t come as much a surprise. Given both economic and national security drivers, the best that was realistically hoped for at this week’s trade talks was a ceasefire, with considerable probability of further tensions.
“Having miscalculated earlier both what’s at stake and the negotiations dynamics in the U.S., China’s current hesitation to make concessions could well increase as we get closer to the American elections next year. This, in turn, makes U.S. tariffs on China more likely, as well as other economic and investment restrictions.
“This will place even greater pressure on the Fed to concede to political and market pressures, both of which only intensified following yesterday’s communication slip by the world’s most powerful central bank.”
SHAWN CRUZ, MANAGER OF TRADER STRATEGY AT TD AMERITRADE IN JERSEY CITY, NEW JERSEY:
“I would fully expect markets to be much more fragile after the Fed meeting. We got the 25 basis points cut. The market wanted that and reassurance there was going to be another one.
“They wanted dovish language and they didn’t get it. They got a balanced statement … the market didn’t want that.
“After that we were on thin ice. The major catalysts are the Fed and trade.
“When you get news like Trump’s tariff tweet, the market’s going to sell first and ask questions later. Look at what’s in the red. It’s all the usual suspects for trade – technology, semiconductors and industrials.
“This isn’t the first time we’ve seen this. It’s at least the 3rd or 4th time … Before we get to the bargaining table we’re going to put something on there and you have to give us a reason to take it off.
“You almost have to look at this as a push-and-pull. The tailwind is earnings looking better than expected coming in and the Fed gave us that rate cut. Then you have the headwind of the situation with China escalating. If you didn’t have the Fed and you got this new we’d be well below 2900. The rate cut helps make the market a little more resistant to a sell off.”
JOSEPH QUINLAN, HEAD OF CHIEF INVESTMENT OFFICE MARKET STRATEGY FOR MERRILL AND BANK OF AMERICA PRIVATE BANK, NEW YORK:
“The biggest issue here is that it looks like the trade truce with China is off the table. That took the market by surprise … The market was content with a truce. Now the threat of escalation is back on the table.
“Investors aren’t panicking but this comes against a backdrop of weaker global trade, weaker manufacturing and weaker earnings for multinationals. The risk for the market to assess is how much this news adds to global trade manufacturing and earnings. The market’s right to be concerned.
“The biggest issue for investors to realize is that this is systemic and is going to be an ongoing issue between the U.S. and china. It creates more uncertainty against a backdrop of uncertainty.
“The markets don’t like uncertainty and this is a bolt from the blue in terms of uncertainty.”
TIM GHRISKEY, CHIEF INVESTMENT STRATEGIST, INVERNESS COUNSEL LLC, NEW YORK, NY:
“Companies will eat tariffs for a while, but eventually they’re going to find a way to pass them to consumers.
“The Fed was holding out hope that we’d have a resolution to his trade issue and this is certainly an indication that there’s no progress.
“Tariffs are not good for the economy. They’re not good for consumers or corporations.
“The Fed is likely at their next meeting to lower interest rates again to help the economy offset the negative impact of this tariff increase.”
RICHARD BERNSTEIN, CHIEF EXECUTIVE/CHIEF INVESTMENT OFFICE, RICHARD BERNSTEIN ADVISORS, NEW YORK:
“The key word is ‘uncertainty.’ Uncertainty acts like the Fed tightening. It raises risk premiums and stymies activity. Full stop.”
JASON WARE, CHIEF INVESTMENT OFFICER, ALBION FINANCIAL GROUP, SALT LAKE CITY, UTAH:
“It’s funny because we are seeing the probabilities of another rate cut in the futures market going up because we have the potential for another round of tariffs on September 1. The read-through there is that the ‘downside’ risks that the Fed is paying closer attention to really is a function of the trade war. They are trying to be gentle in the way they say that – Powell said several times ‘staying in my own lane’ but the true global risk they are focused on is the trade war. So here we are today, with another round of doubling-down on what most people, economists on the left and right agree is a bad idea, and the market is responding in kind. It is more signaling to China than it is to the Fed but how the Fed interprets the potentially downside risk growing because trade is not getting better it is, in fact, getting worse is certainly worth paying attention to.”
MICHAEL O’ROURKE, CHIEF MARKET STRATEGIST, JONESTRADING, GREENWICH, CONNECTICUT:
“Obviously more tariffs are a negative just in terms of trade and the global economy. But also it looks like the president is bullying the chairman of the Federal Reserve in order to wage his trade war, so that should not play well with the market. The market should not appreciate that.
“Again, it’s a further deterioration of the situation. In the first week of May, we were looking at we’re supposed to have a trade deal by May 10th, and now we’re in the first week of August, and we are planning to tariff every single import that comes in from China.
“You had a name like Apple that was very strong yesterday… and now iPhones will come under this new round of tariffs at a point in time when they can’t pass higher costs onto their clients.
“Retailers are feeling it. It’s just more friction in the global economy and a situation where the market has been betting on this situation getting better and then having the benefit of interest rate cuts, and now the situation is getting worse. I would expect we see risk-off trading for the next week or two.”
CHUCK CARLSON, CHIEF EXECUTIVE OFFICER, HORIZON INVESTMENT SERVICES, HAMMOND, INDIANA:
“It shows the market’s sensitivity to trade. This is a continuation of the fraying that seems to be going on with the trade talks.”
“Nobody knows what Trump’s agenda is, what he would look at as a win. Obviously he’s seeing China’s reluctance to do anything towards a resolution, and he’s throwing in a grenade.”
ROBERT PAVLIK, CHIEF INVESTMENT STRATEGIST AND SENIOR PORTFOLIO MANAGER, SLATESTONE WEALTH LLC, NEW YORK:
“Trump is firing these off too quickly where it almost becomes a desperate scenario where the Street does not know how to react. It is hard to understand why this is occurring because we are halfway through 2019 and this (trade with China) is not moving in the right direction.”
“Near term this just creates so much uncertainty for the market, especially on a day that was going so well. Many individual names were doing so well and were attempting to bounce from yesterday’s decline and then something like this hits.”
MAZEN ISSA, SENIOR FOREIGN EXCHANGE STRATEGIST, TD SECURITIES, NEW YORK:
“It’s causing a little bit of havoc. It is certainly weighing a bit on some currencies, particularly (the Australian dollar.) It is also helping to pull down Treasury yields and consequently the dollar is following along for the ride. In particular, the dollar/yen has had a huge whipsaw since the overnight highs around 109.20 – and now we’re heading towards the low 107s.”
“One thing that’s interesting is that after the Fed decision yesterday Trump tweeted in fairly short order his disapproval of it, and so he went outside of the lines to start a trade war.”
“The trade delegation wasn’t as positive as they had hoped and this is certainly trying to put more pressure on that.”
“There have been fairly substantial moves in the rates market, so foreign exchange is not going to be immune to that. But by comparison, outside of dollar/yen, the moves have been a little bit more measured, but certainly still exhibiting some sympathy.”
Americas Economics and Markets Desk; +1-646 223-6300