Why markets aren't worried about the escalating trade war – should you be?

Our market is poised to rise this morning even as China and the US head towards an all-out trade war with the Asian nation slapping extra tariffs on US$60 billion worth of US imports.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Our market is poised to rise this morning even as China and the US head towards an all-out trade war after the Asian nation slapped extra tariffs on US$60 billion worth of US imports.

The move is in response to US President Donald Trump's move to impose a 10% tariff on an additional US$200 billion worth of Chinese goods and some economists estimate this trade war could cost the Australian economy nearly $500 billion over 10 years and send our S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index into a tailspin.

But global investors have brushed off the threat with risk assets, including commodities, rising in overnight trade even as the US dollar strengthened (the greenback and commodities tend to move in opposite directions).

Our miners like BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) should recover from yesterday's losses that were triggered by Trump's second round of Chinese tariffs and the sector may actually enjoy consensus profit upgrades in the coming months (click here to find out why).

If you are confused with the upbeat mood, there are a few explanations for the market reaction. Firstly, investors have largely priced in the second-round trade war escalation and are becoming more de-sensitised to the belligerent Trump.

The 10% tariff, which kicks in next week and rises to 25% at the start of 2019, is also not as bad as the market had feared. There's also a whole range of products from Apple Inc.'s iPhones to baby cots that are exempt as Trump tries not to derail economic growth in his own country as a result of the extra tax.

Investors are also probably relieved that China took a more measured response by targeting a much smaller amount of imports and setting an extra tax of between 5% and 10%.

This could give Trump an excuse to deescalate trade tensions between the world's two largest economies without looking like he's retreating.

More importantly, he may not feel pressured to carry out his threat of hitting all US$505 billion worth of Chinese imports as he has threatened to if China retaliated to yesterday's fresh round of tariffs.

While investors have priced in this latest round of tariffs, I doubt markets have priced in an all-out trade war as this is likely to send the global economy into a recession.

It won't only be resource stocks and those involved in global trade and manufacturing like logistics group Brambles Limited (ASX: BXB) and James Hardie Industries plc (ASX: JHX) that will be hit.

There will be very few places for ASX investors to hide although out-of-favour defensives like Telstra Corporation Ltd (ASX: TLS) and Spark Infrastructure Group (ASX: SKI) could find new friends if our economy wobbles.

Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Brambles Limited, Rio Tinto Ltd., and Telstra Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Investing Strategies

Blue chips with stock written on them.
Blue Chip Shares

Why these ASX blue-chip shares are top buys for this fund manager

Here are two of the most appealing ASX blue-chip shares.

Read more »

Woman smiling whilst shopping in a clothing store.
Dividend Investing

Why this quality ASX 300 dividend stock is tipped to surge 54%

A leading fund manager forecasts significant outperformance from this quality ASX 300 dividend stock.

Read more »

A female broker in a red jacket whispers in the ear of a man who has a surprised look on his face as she explains which two ASX 200 shares should do well in today's volatile climate
Growth Shares

Top brokers name 3 top ASX growth shares to buy now

Why are brokers feeling bullish on these names? Let's find out.

Read more »

Man smiling at a laptop because of a rising share price.
Dividend Investing

Why this is one of my top ASX dividend shares to buy in June

This ASX dividend share provides everything I’m looking for.

Read more »

A happy young couple lie on a wooden deck using a skateboard for a pillow.
Dividend Investing

Forget Westpac and buy these ASX dividend shares

Let's see what analysts are saying about these income options.

Read more »

Two smiling work colleagues discuss an investment or business plan at their office.
Dividend Investing

Brokers say Harvey Norman and these ASX dividend stocks are buys

Let's see what brokers are recommending as buys for income investors.

Read more »

Happy man holding Australian dollar notes, representing dividends.
Dividend Investing

Analysts say these ASX dividend stocks are top buys for income investors

Let's see which stocks are being tipped as buys.

Read more »

Man holding Australian dollar notes, symbolising dividends.
Dividend Investing

Buy these ASX dividend shares for 4% to 11% yields

Analysts expect these buy-rated shares to offer great dividend yields.

Read more »