On June 19, President Trump ordered the US Trade Representative to prepare additional tariffs on $200 billion worth of Chinese goods in retaliation to China’s response to the initial US tariffs on $50bn of Chinese goods on June 15. These days likely mark the end of the rebound trade that started in early April and ended by taking the S&P 500 to just 3% from the January all-time-high at 2,878.50.
The June events came after the May 31 announcement that the US would put tariffs on imported steel and aluminium from Canada, Mexico, and Europe. In a retaliation move, the European Union announced tariffs on selected US goods such as motorbikes, jeans, yachts, bourbon, and cigarettes. We have dedicated our Q3 Outlook, which will soon be published, to the ongoing trade war as this will become a defining moment for the world if it spins out of control. But with equity markets under pressure and several emerging markets having entered a bear market, we want to provide a teaser to our Q3 Outlook with our view on equities during this trade war scenario.
While US equities are rolling over, they have performed much better than Chinese and European equities. The US equity market outperformance is driven by two forces:
1. The US economy and earnings growth is much stronger than the rest of G10.
2. By being a trade deficit country, the US stands to lose less initially in a trade war escalation.