Paul B
Paul B
Jun 12 · 7 min read

My motivation to write is never to make predictions on the direction of asset prices, rather it is to try and examine past trends and make an objective observation. There can be no denying that politics can from time to time have an impact on the markets. The focus for this article is to try and narrow in on the impact that the current ‘Trade War’ is having on stocks listed in the United States. In future articles we will try to touch on the impact of political events and announcements on Bitcoin prices. Now to tariffs.

Tariff a lose-lose

The textbook definition of a tariff is a tax which is put in place on the goods being imported from another country. Tariffs have traditionally been used to try and limit the demand for foreign goods in a domestic market, essentially giving a leg up to local players. Whether tariffs are used for economic reasons or political, they can be painful to players on both sides of the border. On May 30th Donald Trump sent out a tweet talking about his blunt utilisation of tariffs as a political tool rather than to support local players. I believe this is the case because in addition to him stating that it is being used as a retaliatory measure to prevent further illegal border crossing, the list of companies impacted aren’t necessarily limited to ‘Foreign’ or ‘Mexican’ brands alone. Several US based companies will also be impacted by these tariffs.

To better understand the impact of the tariffs on the stock market, it’s first important to understand how the dynamics work. Let’s say there are goods being imported from South of the border, the first impact would be that the goods that fall under these tariffs would become more expensive to the end users. This is because of a ‘tax’ that is imposed on those goods being imported. This tax is borne by the companies that are importing the product, not by the exporter. As a result of this they have one of two options, cover the cost of the tax themselves and charge the customers the same amount, or pass on the extra cost to their customers. The first method would reduce their bottom line and potentially have a negative impact on their stock price, the second method could reduce their top line by reducing demand and have a negative impact on their stock price. Either way, it’s a potential lose-lose situation.

Now to link this back to our discussion. The tariffs being levied on Mexico are not only impacting Mexican brands, but also impacting Ford and Walmart which are massive U.S. companies. In addition to having a direct impact on stock prices for specific companies, another major downside is the market sentiment in general. If one were to track the market movements the day after a ‘tariff’ tweet (May 10th and May 30th), you could identify a relation between the two. On both dates after the announcements there was a clear downward trend in the DJI.

Yahoo Finance

The Mexican tariff war is a relatively new development as compared to the US-China saga that has been on-going since last year. Although the first-time tariffs were brought into the picture was 2018, they were delayed on account of both sides looking at the ‘bigger’ picture. Unfortunately, in the month of May it seemed as though it would not be as easy for the United States and China to come to a compromise.

US stock market was hurt, too.

Like its tariff war with Mexico, in the tariff war with China, the industries impacted are once again not limited to foreign/Chinese industries. One of the major victims of this trade war will be the soybean farmers of the United States. China has already halted the import of soybeans from the United States and decided to substitute their purchases from alternative exporters such as Brazil. The value of the soybean exports from the United States already dropped by 74% in the year 2018 on account of trade tensions. As a result of this, the government announced a 16-billion-dollar subsidy stimulus to the farmers. Money that could have been invested towards increasing productivity by other means.

Companies such as Levi’s also had their stock prices negatively impacted and had to release statements to re-assure investors of the limited impacted impact on their margins. Other victims of the trade war include technology stocks such as Apple and Nvidia. As a result of the tariffs, Apple products could become more expensive, already positioned as a premium commodity, a rise in prices could result in falling demand for an industry giant that is already suffering from slowing growth. Not great for its price on the stock market. While not directly related to each other, the imposition of tariffs on both Chinese and Mexican imports does highlight a new arm-twisting tactic that might be more commonly used in the future, unless the backlash and negative media is powerful enough to convince the white house otherwise. Given the strong rhetoric that the President brings to the table, it seems unlikely that he will be too concerned about the long-term impact on relations with other countries. This will create further fear in the investor sentiment which would prevent them from making large scale investments into several industries and keep prices of various stocks depressed over a longer period.

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American companies aren’t the only ones being impacted by the trade war. Several Chinese companies that have been listed on wall street are also feeling the heat of the trade war and the potential dangers that they face. Alibaba for example is considering a new IPO offering on the Hong Kong exchange out of fear of restrictions that might be imposed on its stocks that are currently being traded on wall street. Not only would this negatively impact the stock prices of all Chinese companies listed in the United States but also prevent future listings on account of a fear of prosecution.

Cryptocurrencies: new alternative for trading

There are certain players in the industry that don’t seem to be as concerned around the tariff war. It is their belief that given the negative impact on the economy President Trump might change his stance on the tariffs to prevent a further negative impact on the stock market as this would have a very negative impact on his re-election chances. All this second opinion adds to the mix is a further level of uncertainty around the direction in which the stock market could potentially go. What this uncertainty does is make people flock to alternative/safer forms of investment that might seem to be more stable such as government bonds or gold. For the risk takers looking for the next bull run, cryptocurrencies might be an asset where they would consider investing considering the spike in prices that have been occurring over the past few months.

In closing I’d like to say that there is clearly a lot of uncertainty in the stock market on account of the decisions that the white house might take. It’s not our place to make a predictions on the direction of the market, but from our initial observations we do believe that cryptocurrencies may emerge as an alternative investment during times of political turmoil. XP Invest will allow users to leverage a bull or bear market by trading across different asset classes using tools like leverage. Technology is an enabler, and we want to use XP Invest to enable investors to leverage market conditions.

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Disclaimer

This material should not be the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions, and is not related to the provision of advisory services regarding investment, tax, legal, financial, accounting, consulting or any other related services, nor is a recommendation being provided to buy, sell or purchase any good or product.Any views expressed on XP Invest blog are the personal views of the authors. The information and data herein have been obtained from sources we believe to be reliable. Such information has not been verified and we make no representation or warranty as to its accuracy, completeness or correctness. Any opinions or estimates herein reflect the judgment of the authors of the report at the date of this communication and are subject to change at any time without notice. XP Invest will not be liable whatsoever for any direct or consequential loss arising from the use of this publication/communication or its contents.

References

https://techcrunch.com/2019/05/14/stocks-gain-back-some-ground-as-investors-assess-the-trade-wars-impact/

https://edition.cnn.com/2019/05/30/investing/stock-market-trade-war-trump/index.html

https://techcrunch.com/2019/05/13/tech-stocks-tumble-as-china-retaliates-in-latest-salvo-of-the-trade-war/

https://www.reuters.com/article/us-usa-trade-china-bonds-explainer/explainer-will-china-dump-u-s-bonds-as-a-trade-weapon-not-so-fast-idUSKCN1SY0BS

https://www.bloomberg.com/news/articles/2019-05-31/markets-reel-as-new-front-in-trade-war-makes-a-bad-month-worse

https://www.cnbc.com/2019/05/30/china-makes-next-move-in-trade-war-reportedly-halting-us-soy-purchases.html

https://www.cnbc.com/2019/05/31/trumps-trade-wars-have-cost-the-stock-market-5-trillion-and-counting-deutsche-bank.html

https://www.marketscreener.com/news/Levi-Strauss-Statement-in-Response-to-Potential-U-S-Imposed-Tariffs-on-Imports-from-Mexico-and-In--28694510/?utm_medium=RSS&utm_content=20190603

https://www.nytimes.com/2019/05/15/technology/alibaba-earnings.html

XP Invest

Cross-asset trading platform. Use your digital assets to unlock new trading opportunities.

Paul B

Written by

Paul B

Manager at XP Invest, we help you trade cross-assets.

XP Invest

XP Invest

Cross-asset trading platform. Use your digital assets to unlock new trading opportunities.

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