Tariffs and trade are in the air as investors and analysts are discussing a now trilateral confrontation, with Donald Trump’s administration now taking the trade fight to both China and the European Union, at the same time. Talk about chutzpah! But what exactly does that mean for the average investor?

With US Treasury Secretary Steve Mnuchin currently on a sojourn to Beijing, there is hope that cooler heads will prevail and a compromise will be found without United States imposing additional tariffs on European and Chinese imports.

But knowing The Donald’s temperament, nothing (no matter how self-defeating) can be taken off the table, which means that a savvy investor should be taking a long and hard look at their equity portfolio to assess risk and get an understanding which stocks can be impacted, and how large is the potential downside.

An important thing to understand is that it won’t be just equities with direct links to impacted products that will be affected. Even companies that are not tied to steel or aluminium or other products on which the White House has hiked tariffs, import duties and quotas have much to worry about.

First, there is an issue of general market sentiment. Markets hate uncertainty, and new tariffs and quotas are always about a changing economic environment, a shift between market conditions that are predictable and measurable and those that are uncertain and fluid. With the negotiations on tariffs, quotas and trade balances between China and US still ongoing, the situation can change every day (or even every hour). Which country gets to export how much steel to the US can send a company shares tumbling, so buyer beware!

Secondly, there is an issue of Chinese retribution. There are suggestions that China will retaliate against quotas by selling their large holding of US Treasuries. Herein lies the rub, however. Any massive selloff by a large holder like China will cause a spike in the yield and decrease the value of the US government bonds that China itself holds (it can’t sell all of them at once, after all). So, any damage China can inflict in the short term in the fixed income markets will come back to haunt it.

Still, US Treasuries are a potent weapon in China’s arsenal and it might feel compelled to use this weapon as a nuclear option if the negotiations collapse entirely. A significant rise in the US bond yield (already pushing multiyear highs) will also be bullish for the USD (and hence the reverse for GBP, EUR and, ultimately, the Chinese Yuan).

What will happen next will depend on how much long-term damage US and China are prepared to inflict on each other. Whatever compromise they reach, both countries are keenly aware that whatever happens, their negotiations will have profound impact on commodity equities, FX markets and global economic growth in general.

Making sense of all the possible financial implications of political decisions can be a complicated and time-consuming task. Here at Accendo Markets we deal with these kinds of multi-dimensional problems all the time and we can help equip you with the same research tools and support instruments that we use in our own daily trading.

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Jermaine Bedlow, Trader at Accendo Markets, 04 May 2018