September 2018 Market Commentary

October 3, 2018

By Jan Faure

The trade fight between the US and China escalated in September as the two economic superpowers hit each other with their biggest round of tariffs yet.

The US imposed 10% tariffs on an additional $200 billion worth of Chinese goods covering thousands of products. China immediately retaliated with new duties of 5% to 10% on $60 billion worth of US goods. The US tariffs are set to increase at the end of the year from 10% to 25%. China hasn’t indicated as yet to how it will respond to that.

For Chinese exporters, the 5.5% weakening of the Chinese yuan against the dollar year-to-date has, to an extent, helped offset the tariffs imposed. US goods exported into China, on the other hand, have been hit with a double whammy of retaliatory Chinese tariffs and a more expensive dollar. So, for now, Trump appears to be coming second in the trade war. The US though can’t complain. Unemployment is at record low levels while the US economy is steaming ahead. Latest GDP figures showed the US economy growing at an annualised rate of 4.2% in the second quarter.

It has not been a good year for emerging markets however. Any global economic instability sees money flow out of riskier EM markets and into safer developed markets. As the chart below shows, both EM equities and currencies have been negatively impacted this year due to global trade concerns and rising US interest rates. The prospect of the US and China resolving their trade dispute, which is in both their best interests, will likely see a rally in EM markets.

Rounding off the month was a trade deal (or truce) reached between the US, Canada and Mexico over the North American Free Trade Agreement (NAFTA). Trump had long taken issue with NAFTA, calling it “the worst trade deal ever”. The new deal leaves much of the old NAFTA intact with some key differences related to the dairy and auto industries. The updated agreement, renamed the United States-Mexico-Canada Agreement (USMCA), is expected to have little overall economic impact.

Source: Bloomberg,, S&P Dow Jones Indices
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