Trump threats over China trade are bad news for Australia

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Forty-one minutes before the opening bell on Wall Street last night President Trump tweeted: “Stock Market could hit all-time high — 22,000 today”.

And he was right, but as he tweeted a change in the US trade environment was being signalled.

But Wall Street took no notice and a surge in Apple stock carried the Dow past the milestone soon after the opening bell.

Trump was right, albeit unusual for US presidents to get into day-to-day market comments.

The Dow index is up more than 3600 points since Trump’s victory last November.

The initial post-election rise in the Dow was closely linked to market enthusiasm for Trump’s plan to cut taxes, bring back capital to the US, kick start US infrastructure and adopt a more protectionist policy—-i.e. to “make America Great again”.

None of that happened. Instead higher profits and the so-called “goldilocks” syndrome drove the market — the economy grew but inflation was benign and the Federal Reserve decided not to be aggressive on interest rate rises.

That outcome might have propelled US shares higher but it caused the US dollar to fall sharply.

In a strange twist, just as Trump was tweeting celebrating the looming Wall Street record, messages came out of Washington signalling that President Trump was about to get tougher on trade with China by launching an investigation into whether Chinese trade practices are unfair. Any such investigation will include the issue of the theft of American intellectual property and clearly was aimed at increasing tariffs and/or tax measures, to limit imports from China.

That’s exactly what Trump promised when he came to office but his policies were sidelined partly by the Russian issues, Obamacare and internal administrative problems but, most importantly, by his meeting last April with China’s President Xi Jinping who promised to curb North Korea.

That has not happened and North Korea is advancing swiftly to the a point where it can fire a missile with an atomic warhead at the US and its base in Darwin, and certainly South Korea and Japan.

China put clamps on North Korea but in Trump’s eyes they did not go far enough, so Chinese trade restrictions are back on the agenda. While it’s early days that threat, if carried out, is not good news for Australia and the Australian dollar.

We have been basking in a strong commodity demand which, while it was mainly generated by internal demand in China rather than Chinese exports to the US, is part of the mix.

In preparation for possible China action Trump tweeted over the weekend that he was “very disappointed” with China, accusing it of profiting from trade and doing nothing on North Korea.

“We will no longer allow this to continue,” he warned.

Trump’s people made it clear that potential trade investigation is partly an effort to put pressure on China to crack down on North Korea.

China responded by warning that the issues should not be “mixed up.” The vice minister of commerce Qian Keming said: “We believe the North Korea nuclear issue and China — US trade are two issues in completely different fields.”

While China has received the US message the quick response by President Trump’s people to the Qian Keming statement was to signal that an investigation was likely to be launched soon.

Any curbs on Chinese-US trade come at a time when the US is putting clamps on Russian trade. This is not good for a globalised world and the profits of many of the 30 US companies in the Dow Index, including Apple.

Last night Apple stock climbed 6 per cent to an all-time high because of optimism about the upcoming iPhone.

The Dow Jones index stocks are priced at about 18 times estimated current-year earnings and the broader S & P 500 index is priced around 19 times earnings.

While low interest rates are a key driver of the US markets, with price earnings rates at these levels nothing must go wrong on the earnings front.

The Australian market is not only closely tied to Wall Street and our own interest rate scenarios but also to the level of global trade and commodity prices.

If, as expected, the China-US trade investigation starts, we have a lot at stake.

By ROBERT GOTTLIEBSEN
The Australian

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