Bassanese Bites: Sell the rumour – Week beginning: 09 July 2018

Global markets remained cautious for much of last week ahead of the Trump Administration’s Friday deadline to impose a 25% tariff on $US34 billion worth of select Chinese imports.  The tariffs duly went into effect and China, as promised, vowed speedy retaliation – without specifying specific measures as yet. As it turned out, however, global stocks then rallied!  It was a classic case of “sell the rumour, buy the fact”, with investors seemingly still confident a deal will be reached before the trade war gets much more serious.

Indeed, it should be noted that even if Trump completes his threat to impose tariffs on $50 billion worth of Chinese imports, that still only constitutes 0.3% of America’s $US18,000 billion economy.  The 25% tax on these imports constitutes 0.075% of GDP.  Of course, if Trump goes all the way and imposes a 25% tariff on the $500 billion of total Chinese imports (3% of US GDP), the tax impact would be a more noticeable 0.75% of GDP – which would be felt through either reduced incomes and/or higher costs and prices.  It’s also likely Wall Street’s reaction will be much less benign if Trump ever decided to make good on these extra threats.

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