Overreaction

Futures Markets opened yesterday to the U2 tune “Sunday Bloody Sunday”. 3-4% down across the board. However, from the macro/trade perspective, things don’t appear to look that bad. In terms of country responses there are three groups: (1) 42 countries, including Mexico, Argentina, Israel, Taiwan, India, Indonesia or Australia, have agreed to eliminate tariffs or to sit down to negotiate. (2) The EU, Japan and the UK, are saying they may implement retaliatory tariffs (which is funny because they were already using them against the U.S.) but seem to be inclined to negotiate. Additionally, at least in the case of Europe, the effective tariff looks ridiculous (see chart below). And (3) China, Canada and South Korea, which have formally said they will retaliate. It looks like the market is focused on the third group, and specifically, on China. But can China afford not to sell goods to the U.S.? Also, can American companies that produce goods offshore, bring manufacturing back to the US, Mexico or Vietnam? It appears the market is worried about the mismatch in terms of timing between those decisions and the actual implementation, since you don’t start a factory in 2 months (unless you’re Elon Musk). If this analysis is somehow correct, is that a severe overreaction? It doesn’t look like it’s the Yen carry trade unwinding, as the currency has not move that much. Who wants to (or benefits from) put more pressure on Trump to abandon this idea?

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