Fears of an impending trade war between the U.S. and China have made investors leery, with Trump's imposition of up to $60 billion in tariffs on Chinese goods and Chinese plans to exercise duties of up to $3 billion on American imports such as fruit and wine fueling concerns over an unstable market.
"There is concern what the trade war could look like. Investors want to manage their risk. If it escalates rapidly, it could be a major headwind for the market," said Peter Kenny, senior market strategist at Global Markets Advisory Group.
The situation may be reminiscent of the Trump's administration's decision in early March to establish tariffs on steel and aluminum imports, which instigated a steep selloff that ultimately resulted in most of the losses reclaimed in the following weeks. This may be why investors are pulling out their money for now, planning to keep safe until the choppy waters subside.
Trade wars, especially those placed on staple goods such as fruit and basic foods, exert pressure on prices of these goods as the burden of the tariff is passed on to the consumer. A rise in inflation could prompt the U.S. central bank to accelerate its pace of interest rate hikes, possibly slowing economic growth as it could exacerbate the existing inflationary pressure and dampen growth and expansion on the part of both consumers and firms. Trade skirmishes can also hurt U.S. exports and corporate earnings.
Not everyone is buying into the threat of a trade war, however. Rob Plaza, senior equity analyst at Key Private Bank in Cleveland, notes that: "Investors think it is basically a negotiating tactic that the president is using to improve the country's trade deals."
The fact that the Fed raised interest rates to their highest level in a decade on Wednesday has also elicited concerns from investors worried that this will stunt business growth and expansion. These worries are further confirmed by the fact that corporations whose affairs are conducted primarily overseas were hit worse than others, with Boeing
A ministry statement on Friday said the higher U.S. tariffs "seriously undermine" the global trading system: "China doesn't hope to be in a trade war, but is not afraid of engaging in one. China hopes the United States will pull back from the brink, make prudent decisions, and avoid dragging bilateral trade relations to a dangerous place."
In response to the U.S. tariffs on China, the country's foreign ministry suggested soybeans, airplanes, cars and cotton could be targeted. The Chinese government could also target U.S. technology companies that manufacture products in China, such as Apple (NADSAQ: AAPL), to really undercut Americans.
This would be especially pertinent considering Apple's prospective data center in China and previous technology company concerns over privacy issues in the state. The added pressure of tariffs would likely push corporations away from the region, which would drastically affect both American and Chinese economies.
