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Investors look past Trump tariffs

Asia markets have been able to shrug off last night’s largely expected escalation in the US-China trade spat, rising sharply in a classic case of “sell the rumour, buy the news”, as President Trump outlined a new plan to put a 10% tariff on another $200bn of Chinese goods, starting 24 September, with a pledge to raise them to 25% in the event of no progress by year end.

With Chinese stocks already at their lowest levels since 2016 maybe a rebound in the Shanghai Composite was overdue, however it is hard not to believe that they may have got a bit of a helping hand. The rebound in Asia appears to have extended to this morning’s European open, which after a slow start has seen markets edge higher, though the FTSE 100 has lagged behind somewhat.

The deferred nature of the extra tariffs appears to have convinced some in the markets to indulge in some light buying on the basis that any ripple-out effects from the latest tariffs are only likely to be felt further out in the revenue cycle. While that may be true it is also based on an assumption that the US is keen to make a deal. On current evidence it is far from clear that that this is a safe assumption to make.

Despite treasury secretary Steve Mnuchin’s attempt to open a dialogue last week with the Chinese, it seems quite clear that President Trump is uninterested in arriving at a quick resolution to this dispute. If, as most suspect, this is a ploy to play to his base ahead of the US midterms, it doesn’t leave much time between the timing of these elections, and the end of this year to arrive at a deal, and prevent a move to 25% tariffs.

It’s therefore not hard to sympathise with the Chinese position that the US is not negotiating in good faith, with Chinese leaders getting one message from the likes of Mnuchin and Larry Kudlow and a completely different one from the president himself.

While companies like Apple have been able to gain exemptions from this round of tariffs, along with a range of other items, including bicycles and agricultural items, there is no guarantee that they won’t get a caught up in any future escalation, if as expected, China push back.

This will shift attention to Chinese retaliation, and where this morning’s announcement of retaliatory tariffs will likely fall. We could also see further measures to protect its export base with some tax reliefs, while other measures could include a further weakening of its currency with a move towards 7 against the US dollar becoming ever more likely. We could also see a further easing of monetary policy in the form of easing bank reserve requirements.

Along with most in the retail sector, Ocado shares have been on the back foot in the last couple of weeks, but have rebounded strongly this morning after reporting an 11.5% rise in Q3 revenues, which was largely in line with expectations. In the last year the company has announced a number of high profile warehouse technology deals with large overseas food retailers, Casino of France and Krogers in the US. The company did not outline how much in terms of revenues these recent deals have added, or could add to its bottom line, but management did say that the company’s new warehouses at Andover and Erith were performing well.

Today’s rebound in the share price is welcome given recent declines, however the gains do appear to be predicated on investors filling in the blanks when it comes turning these new deals into significant levels of sustainable profits. It’s all very well management claiming that these deals will bring greater value and quality to the shopping experience, at some point investors will want to see the results in the form of accrued profits, to justify the current valuation, which means management will need to provide further details in the coming months.

Yesterday saw tech shares in the US slide back in expectation of new tariffs being imposed by the US, with Apple shares leading the tech sector lower. Having gained an exemption on this latest round of tariffs, Apple shares could enjoy a modest rebound on the opening of US markets, which may well open higher this morning.

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