By Joyce Yu
Philadelphia, PA–Wall Street opened higher on Monday, extending gains into the third day. But what investors have been worrying for month is happening – a trade war is here. With the Q2 earning season just around the corner, the market will focus on guidance provided by companies on tariff impact.
“Incoming data show a soaring U.S. economy, a healthy labor market, and some rebound in Europe and Japan,” Barclays economist Michael Gapen told the Reuters. “For now, overall policies and financial conditions still support growth and investment.” He further added, however, “A sharper-than-expected China slowdown from a domestic credit crunch and external trade tensions could be the main risk to global growth.” “Trade tensions fan concerns about the future.”
On Friday, 25% tariffs on $34 billion worth of Chinese goods imposed by the US took effect, and the Chinese government responded in kind. This is in addition to Trump administration’s tariffs on steel, aluminum, solar panels and washing machines which kicked off retaliatory tariffs from around the world. Automakers have already indicated adverse impact from the global trade war. Due to tariffs, a Toyota Camrys will cost $1,800 to make, German automaker Daimler which owns luxury car brand including Mercedes-Benz foresees its 2018 profit squeezed and Harley-Davidson is moving some motorcycle production out of the United States to avoid tariffs.
Analysts expect little impact to be reflected in second-quarter earnings for most businesses, but guidance from companies’ leadership for the third quarter will be key. Based on reactions from companies, there is evidence that tariffs are having an immediate impact on earnings.
A study by asset manager Invesco showed more than a third of sovereign investors plan to cut their equity exposure over the next three years for trade wars, geopolitics risk and high market valuations. Equities overtook bonds to become the biggest asset class in portfolios, according to the report which is based on interviews with 126 sovereign investors and central bank reserve managers with $17 trillion in assets, with yet 35% participants planning to reduce their equity exposure over the medium term. Another 40% said they were happy with the current allocation.
Survey participants had been “pretty far-sighted”, said Alex Millar, head of EMEA sovereigns at Invesco, highlighting the risk of a trade war early in the year. “Equities had a good run last year, but this hasn’t caused investors to change their long-term expectations – they think returns going forward will be tough.”
Focusing on this week, several major companies are set to report earnings, starting with PepsiCo on Tuesday, and Delta on Thursday. Banks including Citigroup, JPMorgan Chase, PNC and Wells Fargo are all planning to report on Friday. Separately, Chinese smartphone company Xiaomi went public in Hong Kong on Monday but slide 1.2% on debut.
