The maverick president’s erratic approach to international trade has taken a significant bite out of the Dow Jones (DJIA) over the last few weeks.
Bulls will be desperate to see Trump’s bromance with Japanese PM Shinzo Abe survive the weekend, lest the US find itself plunged into another brutal trade conflict.
The US-China trade war dominates the global stock market outlook because they are the largest economies in the world, as well as two of the most interlinked. However, the Trump administration’s disputes with key allies like Japan also threaten the Dow Jones and other major indices.
Japan is a vast economy in its own right, and there is a significant US military presence in the country. The talks between Abe and Trump will likely focus heavily on defense spending.
The elephant in the room, however, is the auto industry.
Trump knows that struggling US auto-workers form a crucial component of his blue-collar base. Japan, meanwhile, remains a dominant force in global car manufacturing.
If Trump pushes a harder line with Abe, he likely will take on the EU as well. The subsequent fallout could be disastrous for the Dow.
If Trump starts squeezing his allies for a good headline, we could find the world’s four largest economies – the US, China, Japan, and Germany – involved in a multi-dimensional, growth-stifling stand-off.
The outlook for the Dow and other major indices gets even bleaker when you consider that the United Kingdom sits at number five. Ravaged by Brexit, the British now have to decide on a new leader with the risk-negative Boris Johnson currently the betting favorite.
The sudden escalation to the US-China trade conflict has already led analysts to break out the dreaded “r” word: recession.
Here’s Morgan Stanley:
“If talks stall, no deal is agreed upon, and the US imposes 25% tariffs on the remaining $300 billion of imports from China, we see the global economy heading towards recession.”
And that’s without the additional pressures that Trump’s spats with Europe and Japan could cause.
Even worse: Given ballooning stock market valuations, the potential for a recession was high anyway.
What investment banks remain reluctant to discuss is what would happen if Trump exports his trade war to his friends as well as his foes. In this circumstance, the $600 billion estimated losses from Trump’s current trade war would be chump change.
Further darkening the market’s outlook, the Dow Jones Industrial Average recently formed what looks alarmingly like a head-and-shoulders pattern on the monthly charts.
This tells us that the bulls have been buying the dips, but there aren’t enough buyers to push the index to fresh highs.
If Japan produces a tremendous pro-Trump headline, stocks could rally once more. However, given the current set-up, price spikes are meaningless until the Dow can confirm a new breakout to the upside.
This article was edited by Josiah Wilmoth.