Trump orders new tariffs on China made clothes and shoes. US economic recession indicators flashing

Just as the world thinks that it can take a breather from the trade war in July, thanks to the resumption of talks between and US and China, President Trump threw another rock into calming waters and reignited the trade war by threatening to slap a 15% tariffs on the rest of the $300 billion worth of China imports starting from 1st Sep. He also threaten to increase the current tariff on existing China made goods from 25% to 30% from 1st Oct. In return, the Chinese slap a 25% tariff on US goods and banned all agricultural products from US. After strong pressure from US businesses, Trump decided to delay half of the tariffs after 15 Dec, and lowers the tariffs from 15% to 10%. Meanwhile, consumer items such as clothes and shoes (Nike shoes!) will see a 10% tariffs from 1st Sep onward. Trump has previously held off imposing tariffs on key essential consumer goods, fearing that it will erode the US consumption power as the result of a higher cost but have decided to use this important tool to gain leverage in the trade war negotiation.

The stock market shivered at the news and corrected sharply. Investors started taking shelter and pile into longer term US treasuries, and the US treasury yield curve inverted further, creating a loud signal on the high possibility of a US recession. The US economy typically lapse into a recession 6 month - 1 year when the yield curve inverts. 

Singapore's GDP forecast was slashed down to 0.6%, down from an expected 2.1% as the trade sensitive Singapore economy took the brunt of the trade war damage as global trade starts to slow in the face of protectionist policies. Singapore is like a canary in a coal mine for the global economic health and should Singapore lapse into a recession in 2019, it is highly possible that the world economy will lapse into a recession in months to come. However, an unpredictable Trump administration makes forecasting the direction of the global stock market almost impossible as he may suddenly reverse course for a minor concession and declare the trade war over. This pressure will intensify as US will hold a Presidential election in next year Nov and Trump may give way to the China side, in a bid to boost the economy and the stock market in order to get a better chance of winning the election.

Portfolio Performance and Strategy

The portfolio re-balancing exercise in July came timely as we trim down the equities components and redirected a sizable proportion of the portfolio into longer duration bonds, which benefited immensely in the wake of the trade war. The bond position rallied 3% during Aug while US and Asian equities lost 2% and 5% respectively. This cushioned the portfolio fall in Aug.

Going forward, we will continue to trim the equity portion of the portfolio, especially the emerging market component which will be hit the hardest if both US and China economies slow down. The portfolio will be well positioned to weather any potential bear markets and our strategy has changed from one of growth to one of protection.