Wall Street Asks Whether Trump’s Tariff Threat Is a Tactic or Not

(Bloomberg) -- Policy analysts are offering a variety of interpretations of President Trump’s latest tariff threat. Some, like Goldman and Citi, are optimistic a U.S.-China deal can still be reached. Others, including Raymond James and Cowen, are more cautious, warning the process may have been derailed, and point to rising global risks.

Investors weren’t happy about the news, with the S&P 500 dropping by as much as 1.6 percent in early Monday trading, the most since March 22. Tech and machinery companies were hard hit, with Alibaba Group, Apple Inc., Boeing Co. and Caterpillar Inc. all sliding. Bellwether banks such as Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. were all falling 1.5 percent or more.

Here’s a sample of what analysts are saying:

Goldman, Alec Phillips

Goldman believes a tariff increase may be “narrowly avoided,” putting odds that tariffs rise on Friday at 40 percent, Phillips wrote in a note.

Will be watching whether a large delegation of Chinese officials comes to Washington on May 8, as scheduled; canceling would mean an agreement in the coming week would “seem very unlikely,” and would make an increase in the tariff rate to 25 percent “the base case.”

China trade issues have “negative implications for the outlook for auto tariffs and passage of the USMCA [U.S.-Mexico-Canada Agreement].” Trump’s “willingness to risk a market disruption by threatening an unexpected tariff hike suggests that he might also be willing to risk the disruption that formally proposing auto tariffs or announcing the intent to withdraw from NAFTA might cause.” Phillips raised the probability that auto tariffs will be implemented later this year to 20 percent from 10 percent, and lowered the probability that USMCA will pass to 60 percent from 70 percent.

Citi, Cesar Rojas

“Cautiously optimistic” on a U.S.-China trade deal in the second quarter, though tariff threats will likely “remain as a way to get concessions from China and to enforce the agreement,” Rojas wrote in a note.

Rojas had expected that as the Chinese economy stabilized, “China would be less willing to provide additional concessions to the U.S.” The new threat is “consistent with the U.S. adding more pressure on China to get these concessions.” The Trump administration “pays attention to equity markets,” which means stocks diving could lead to a retreat from implementing the tariffs threat.

Even so, he continues to believe “uncertainty is likely to remain high as the tariffs threat remains in place and second round effects from a reallocation of global trade remain underestimated.”

UBS, Robert Martin

“The president’s words are worrisome but not yet our baseline,” Martin wrote in a note. “We continue to assume that trade talks, by hook or crook, continue and that ultimately the two sides reach agreement,” though the downside risks “are obvious.”

RBC, Lori Calvasina

A trade deal with China has been widely anticipated by investors, and was a "key contributor to the early 2019 rally in US equities," Calvasina wrote in a note.

That means the weekend’s developments were a negative catalyst for the market not only because of investor sentiment, but also "because of the downward earnings revisions that are likely to occur if the tariffs are expanded."

Sees "these steps backwards on the trade deal with China as particularly negative" for industrial and semiconductor companies.

Morgan Stanley, Michael Zezas

The threat of higher tariffs may be “a pressure tactic to speed an agreement on pending issues such as existing tariff removal timing, details related to the enforcement mechanism and industrial subsidies,” Zezas wrote in a note.

Morgan Stanley expects a “re-escalation would be temporary, as market weakness would help bring both sides back together,” but warned that “any escalation inherently augments uncertainty and further undercuts risk markets, where a Goldilocks outcome was already priced in.”

Raymond James, Ed Mills

“The progress towards a U.S.-China deal has been up-ended with renewed tariff threats by President Trump ... apparent balks by the Chinese (especially on tech transfers), and the threat of the Chinese delegation canceling this week’s round of negotiations,” Mills wrote in a note.

Conversations with Raymond James’s trade contacts point to “a universal belief that this is not negotiating leverage, but what was almost a done deal last week, has derailed in recent days. There is some hope that negotiations could be salvaged, but this situation highlights how tenuous any U.S.-China deal remains.”

Contacts have revealed questions about “what led to the latest breakdown, and whether developments related to Venezuela, the Iran oil sanctions decision, North Korea’s weekend missile test, or lessening worry about the economic conditions in both the U.S. and China influenced the direction.” Geopolitical volatility spiking in recent weeks may signal “ a more difficult path ahead for negotiations.”

MUFG, Chris Rupkey

“For weeks now markets have been lulled to sleep on the U.S. trade war with China thinking an agreement was imminent. No more,” Rupkey wrote in a note.

“This has all the makings of a complete disaster that could lead the stock market to crater this week,” he said. It may also jack up “external risks to the U.S. economic outlook,” just a few days after Fed Chairman Jerome Powell said global risks had moderated somewhat.

Compass Point, Isaac Boltansky

Trump’s threat to hike tariffs is “a standard part of his negotiating style and we remain bullish on the prospects for a deal in the coming weeks,” Boltansky wrote in a note. Though there “will be puts and takes in this story,” believes “pressure on both sides of the Pacific will ultimately catalyze a deal.”

“Beijing is sending roughly 100 representatives to Washington this week, which we view as indicative of their belief that a deal is within striking distance.” At the same time, he warned that “once attention turns from China to other trade matters – including the USMCA – market sentiment regarding trade policy could turn more cautious.”

Cowen, Chris Krueger

The “return of Tariff Man” is “pretty shocking and surprising - even grading off the Trump Curve,” Krueger wrote in a note.

Krueger offered several interpretations. The “cautious” one suggests “this is simply an intemperate tweet (s) by a president that can’t help himself during a rainy Sunday afternoon...Trump really, really wants to see this deal finished by Friday and (perhaps mistakenly) believes this gives the U.S. leverage.”

The "not-so-cautious" interpretation is that “this is not an outer-borough real estate transaction. Trump issued a Presidential Statement last week highlighting his gift as the world’s premier hostage negotiator; tariffs are a very dangerous hostage and we believe will be seen as both provocative and insulting by Beijing. ”

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