So this morning we have confirmed that the US raised tariff rates. Here is what we know currently:
1) US raised tariff rates on USD200bn of Chinese goods from 10% to 25%.
2) China says it deeply regrets the move and will retaliate.
3) Trade talks will continue Friday.
4) The two sides only talked for 90 minutes on Thursday.
5) People close to the talks said to Bloomberg there is "little to no progress" in the talks.
Comment: The only good news here is that China stays for talks on Friday. The fact that talks were only 90 minutes suggests there was little movement on both sides. The talks Friday will probably focus on how to get talks back on track.
Best guess now is that both sides talk Friday and then pause for a rethink of how to proceed. If so, we are in for a period of high uncertainty. But we need to await the outcome of Friday's talks to make closer assessment.
We do not know details of how and when China will retaliate. But I think they will try to be measured on the surface, but start to halt purchases of US agricultural goods again. Tariffs may go up but China will aim to use measures that hurt the US but not themselves. That is why quantitative measures are better since they can buy agricultural goods elsewhere.
After Friday we should look out for whether Trump initiates the process of putting tariffs on the USD325 bn of Chinese goods he said he would do in his Sunday tweet. It would be a sign that the parties are far from each other and escalate matters further.
There are many scenarios from here but our baseline is still that we will have a deal by the end of Q2 – so within two months. The road there can take many paths, though. There is also a real risk that the problems are bigger and Trump adds more pressure with tariffs on all Chinese goods. This would be a mistake in our view as it would backfire quickly. But it is also a scenario that cannot be ruled out. For now, we need to see what comes out of the talks Friday. It can flip to both sides: further escalation, or resumption of talks with the aim to get a deal soon while tariffs and countermeasures are in place.
Note that apparently the tariff rate will not hit goods in transit but only goods shipped from China on 10 May. It leaves a window where tariffs will not be put on goods until they have reached the US with the potential they could be removed by then if a deal is struck.
This publication has been prepared by Danske Bank for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Bank's research analysts are not permitted to invest in securities under coverage in their research sector.
This publication is not intended for private customers in the UK or any person in the US. Danske Bank A/S is regulated by the FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange.
Copyright () Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.