Last week markets appeared to be fully discounting positive outcomes on Trade and Brexit. The fear was that if no trade deal or hard Brexit happened, markets would sell-off and this is exactly what happened in the wake of Donald Trump’s tweets on last Sunday.
He tweeted that the US would raise tariffs on $200bn of Chinese imports from 10% to 25% on Friday 10th May as well as impose a 25% tariff on an additional $300bn of imports, which are not taxed currently.
British and American investors woke-up to the news that this week’s trade negotiations failed to see a trade deal agreed or produce a stay of execution from the first batch of tariff increases. However, tariffs of 25% are only applied to goods leaving China from Friday 10th, not on those which are in transit from Chinese ports to US ports. These will be grandfathered in as they reach the US but there is an unofficial two-week window (roughly the length of time it takes a cargo ship to travel from China to the US) where a positive development on trade may see the US remove the 25% tariff rate.
Goldman Sachs assign a probability of 30% to the outcome of Trump imposing tariffs on the untaxed $300bn of goods. This is because consumer products will get hit by the new tariffs and this is politically expensive for Trump. New tariffs take a couple of months to impose as legal and regulatory approval is required; in this time, the two sides could reach a deal and these tariffs are averted.
The question the week’s events have posed for markets is: can a no-trade deal situation wreck the chances of a rebound in European and Japanese growth? This is especially pertinent as German industrial production rose last month, surprising most analysts who thought it would fall. If the global growth engines of China and the US stall because of trade, the progress made could be knocked off track.
Elsewhere, Mike Pompeo, the US secretary of State, visited Baghdad this week to provide assurances to Iraq that the US will protect the country’s democracy as Iran is “escalating activity”. This occurred the day before news broke that Iran would cease to implement some of its commitments under the 2015 nuclear accord. With Iran seeking influence in Iraq, there is potential for a new flashpoint in the Middle East, which may impact markets.
On the tech front, Lyft’s market valuation dropped below $15.1bn
in pre-market trading yesterday, an important level as this is the valuation it
received in its last private funding round before listing its shares. Impacted
by the fall in markets and abysmal performance of Lyft, Uber shares will be
priced at $45, the low end of the $44-$50 range it had. This gives the company
a valuation of $82bn, making it the biggest US tech IPO since Facebook in 2012
but falling short of the desired $100bn mark.