Over the weekend, US president Donald Trump tweeted that tariffs on $200bn worth of Chinese goods will increase from 10% to 25% on Friday.
Trump accused China of attempting to renegotiate previously agreed trade terms and added that $325bn of additional goods from China “remain untaxed, but will be shortly at a rate of 25%.”
Robert Lighthizer, the US’s chief trade negotiator reiterated Trump’s claim on Monday and accused China of reneging on previously agreed commitments.
There is no guarantee that this tough talk on China will result in the collapse of trade talks between the two countries, set to recommence on Wednesday, or that a failure to reach an agreement will send equity markets into freefall.
But hostility will break the belief many investors hold that China and the US were likely to reach an accord on trade.
“The threat of a ratcheting of US tariffs on China this coming Friday and a much more entrenched trade dispute has not been discounted by equity markets,” analysts at Jefferies wrote in a note on Tuesday adding that trading suggested that most investors saw the rhetoric as little more than a threat.
A trade war between China and the US was often blamed as a driver for the fall in stock markets last autumn, which severely damaged investor returns and equity capital market issuance.
A combination of a US Federal Reserve reluctant to raise rates and warmer relations between the two countries has helped the stock market to recover, and ECM bankers are hoping markets will keep rising in order to spur primary issuance.
The S&P 500 is now back at record highs and is trading just above its most recent peak last September, erasing the losses of last autumn.
US corporates have also largely reported strong earnings growth, which has led to hopes that the rally may run on.
However, an increase in tariffs on the back of a reignited trade dispute could hit revenues for the rest of the year given the importance of trade between the world’s two largest economies and the integration of global supply chains.
There is no guarantee that hostile talk from the Trump administration is just a negotiating ploy, even if it has been his style since he took office.
Trump may feel he has enough leeway to be belligerent given the antipathy for China among his supporters and a growing US economy, .
China’s president Xi Jinping is also unlikely to give too much ground to Trump and lose face at home.
Investors speaking to GlobalCapital last week were confident about equities in the medium term but feared that an unknown “black swan” could destroy the confidence that has led to such strong returns this year.
If Trump and Xi’s talks break down this week, they may regret not spotting one that was hiding in plain sight.