'Tariff man is back,' major Wall Street strategists declare as trade ceasefire ends

“The tariff announcement is a major escalation in our view. Past measures had mostly avoided consumer goods. By contrast, the threatened tariffs would cover $120bn of consumer goods, out of $300bn in total. We expect the tariffs to be implemented, either on schedule or later this year. Given the administration’s willingness to go after consumer goods, we think all options now may be open in terms of further trade-war escalation… But we would not rule out across-the-board 25% tariffs on Chinese imports, tariffs on autos and parts or measures against countries such as Vietnam that have large and growing trade surpluses with the US…There are also risks of unintended consequences. Trade-war escalation could extend the global monetary easing cycle. As a result, the dollar could remain strong despite Fed cuts. This could lead to more tariffs or currency intervention by the US.”

“Tariff man is back … If Trump really wanted his 50 bp cut, he should have tweeted yesterday. The return of these increased tariffs is clearly unwelcome news, especially for consumer staples and tech companies that had hoped they avoided these additional tariffs. Market sentiment, based upon extensive conversations and meetings with clients, is that Trump may rattle the cage on these trade fights, but will not do anything to harm the economy/cause a real market sell-off before the 2020 election.”

“While this leaves time for negotiation, we will treat these tariffs as likely to go into place for 2 reasons: 1) this administration historically follows through on tariff plans; 2) fundamental disagreements remain, making the benefits of escalation appear greater than cooperation to both sides. Weaker risk market performance could change this dynamic and our view. Even if these tariffs don’t go forward, ‘slowbalization’ remains intact & existing tariffs are likely to stay.”

“The announcement further increases the odds that these tariffs take effect, which was already our base case. However, with one month until the effective date there is still some uncertainty as to whether they will be implemented. The next step to watch will be the release of an order including the final tariff list, effective date, and tariff rate, which we expect in 1-2 weeks.”

“Importantly, we don’t think trade talks will break down because of the new tariffs. On the US side, President Trump suggested in the same tweet that trade talks will continue despite the new tariffs. … The speaker responded, at the time, that new tariffs would ‘set new obstacles’ and ‘make the journey to a trade deal even longer’, but he did not suggest that China would stop the trade talks. We think the Chinese delegation led by Vice Premier Liu He will still visit the US in September. Before that visit, though, we don’t expect much progress to be made at the working level. Some retaliation measures by China are likely.”

“This is an unexpected turn of events given the Shanghai negotiations were cited as constructive by both delegations, and China has committed to buying more soybeans from the US. Looking back at the last two years of trade negotiations, this should not be too surprising. It could be seen as a way to extracting maximum concessions from one’s negotiating partner.”

“President Trump’s announcement does stress the importance of ongoing negotiations, and there is ample time for negotiations to result in another ceasefire, thereby forgoing or delaying these threatened tariffs. However, this re-escalation of tensions also indicates that President Trump is prepared to escalate trade disputes even while campaigning for reelection. The president even seems willing to up the ante even further, by suggesting that the rate could rise to 25%, or even higher, if negotiations remain stalled. … While we ultimately believe that US-China trade tensions will be resolved through negotiations, equities may struggle to move markedly higher until there is greater certainty.”