Trade War Heats Up As China Retaliates

Market Uncertainty Rises Amidst Trump Tariffs

Feb 13, 2025

MARKET RECAP

Latest News. On February 12th, the Consumer Price Index came in at 3 percent year-over-year, up from 2.9 percent in December, and higher than expected. Consumer inflation fears have also risen by 1 percentage point from January to February, driven by worries about tariffs.

On February 4th, the White House imposed 10 percent tariffs on Chinese imports. Beijing responded with tariffs of its own, taxing coal and liquified natural gas at 15 percent, and crude oil, agricultural machinery, and large-engine cars at 10 percent.

Markets in China reacted to the news with greater volatility. The yuan fell 0.3 percent against the U.S. dollar, and the Hang Sang China Enterprises Index falling by 1.7 percent. Since the tariffs were announced, Chinese markets have pared losses.

Shaun Rein, Founder and Managing Director of The China Market Research Group, said that Trump’s tariffs were in part responsible for China’s “weak” economy and low consumer confidence.

“The weakness that people are going to be surprised about is just how weak Chinese New Year spending was,” he said. “We interviewed a lot of hotels, and the price per room was 10-20 percent in most five-star hotels, because consumers are scared about whether or not Trump is going to slap 60 percent tariffs. Chinese consumers are scared whether there will be military tension over Taiwan.”

Michael Beckley, Associate Professor of Political Science at Tufts University, largely agreed with Rein’s assessment. However, unlike Rein, Beckley was skeptical about Trump and Chinese President Xi Jinping working out a deal to reduce trade tensions.

“I’m maybe a little more bearish on the idea of some future deal,” he said. “I know that Trump and Xi decided not to meet, and I just see these things escalating naturally… I actually think the 10 percent [tariff] is the opening gambit of the Trump administration.”

He added that Trump’s administration would like to scale tariffs on China up to 60 percent, which would hurt both U.S. and Chinese economies.

“I think it’s going to hurt consumers on both sides of the economy,” he said, “but I think because China is more export-dependent than the United States, a trade war is just going to hurt its macroeconomy more than the American economy.”

Rein said that there is “no need for America to be fighting against China.”

“I don’t believe in this Great Power hatred and politics that a lot of people push,” he said.

However, Beckley predicted that because the Chinese economy is weakening, Beijing could seek to affirm its strength through a possible military intervention in Taiwan, or another hot conflict in the South China Sea.

“For China, it’s like, if you’re going to try to strangle our economy, well then there’s no reason we have to contain this within the economic sphere,” he said. “There’s plenty of other areas [China] can cause problems for the United States or some of its allies… We’ve seen historically that trade wars often will precede periods of intense conflict… I fear that this cycle of retaliation is feeding on itself at this point. I would expect things to get worse, both economically and on the geopolitical front, before they have a chance to get better.”

Market Movements

From February 5th to February 12th, the following assets experienced dramatic swings in price. Data are up-to-date as of February 12th at 9pm ET (approximate).

Uber Technologies — up 23.1 percent.
Lions Gate Entertainment — up 20.8 percent.
Palantir Technologies — up 15.8 percent.
Tesla — down 11 percent.
Zillow — down 7.4 percent.

The following major assets experienced the following price movements during the same time interval.

DXY — up 0.1 percent.

Bitcoin — down 0.6 percent.

Gold — up 1.7 percent.

10-year Treasury yield — up 4.3 percent.

S&P 500 — down 0.2 percent

Russell 2000 — down 2.6 percent.

USD/yuan — up 0.5 percent.

ECONOMY:
SOVEREIGN WEALTH FUND A GAME CHANGER
Axel Merk, February 6, 2025

President Donald Trump may be an “anchor of stability in an increasingly unstable world,” said Axel Merk, President of Merk Investments.

He pointed to the U.S. political system being more robust to populist leaders, and the claim that Trump lacks a strong majority, hence weakening his mandate.

“… Obviously the opposition to whatever Trump wants to do is going to ramp up,” he said. “Trump doesn’t have a big majority, and so he has to do things with executive orders. And so, we’ll see pan out in the coming weeks which of these things will stick, and which ones the courts will push back on.”

On February 4th, Trump ordered the creation of a U.S. sovereign wealth fund, which Merk said suggests “more active industrial policy” on The White House’s part.

“[Industrial policy] means… the government is more involved in the allocation of resources… [which means] resources are going to be allocated less efficiently,” he said. “It also means, in many ways, that the cost of doing business is going to go up and tariffs are going to be elevated. And all of that warrants a lower long-term yield, and in many ways a higher price of gold.”

When it comes to the White House’s newly-created Department of Government, headed by Elon Musk, Merk was skeptical that it would make substantive cuts in government spending.

“There is nothing more popular than highlighting government abuse,” he said. “What does it mean for the long-term fiscal sustainability?… There, I think I’ll just sit back and eat my popcorn.”

ECONOMY:
MARKETS ARE GETTING ‘DANGEROUS’
Gary Shilling, February 5, 2025

Market participants have become increasingly uncertain due to President Donald Trump’s trade and fiscal policies, according to Gary Shilling, President of A. Gary Shilling & Co.

“Trump, clearly, he’s a master of uncertainty,” he said. “I think he revels in the idea of keeping people off-balance, and creating a certain amount of uncertainty.”

Shilling pointed to the example of Elon Musk’s Department of Government of Efficiency, created under Trump, which has been cutting government spending in an unpredictable manner.

Despite this uncertainty, Shilling said that he is “long the dollar.”

“The dollar is the global currency, and it’s the place people go in times of difficulty,” he said. “If you look at total investment flows, dollar transactions — both trade and investment — 88 percent of them involve the U.S. dollar.”

Shilling also dismissed the idea of de-dollarization due to trade wars.

“I think the trade war is in favour of the dollar,” he said. “It’s a safe haven. I mean, can you imagine, if you’re looking at a trade war… are you going to rush into the Swedish krona? Probably not.”

While gold is perceived as a safe haven, its long-run real performance is “flat,” said Shilling.

“Gold is affected by trade wars, it’s affected by shooting wars, it’s affected by international currency movements,” he said. “There’s a lot of forces, and a lot of times they just seem to cancel each other out.”

GOLD:
GOLD COULD HIT $3,100 IN 2025
Gary Wagner, February 5, 2025

The gold price could breach $3,100 in 2025, according to Gary Wagner, Editor of TheGoldForecast.com.

Gold has hit a record-high of over $2,880 over the past week, and based on market trends, if its recent pattern continues then gold will reach new all-time highs in 2025, said Shilling.

“[From October of 2023 to April 2024], [gold] runs up approximately $500, a 27 percent rise, and it did that in 230 days” he said. “We had a second leg of the rally, and on this rally it took 122 days, and it increased at about $454. I simply averaged out these price moves… For the first half to the third quarter of this year, [we should see] gold substantially higher, well above $3,000, and actually breach $3,100.”

Shilling said that even if the Fed does not cut rates in 2025, his forecast would not change significantly.

“I still think it’s going to easily hit $3,000, and possibly challenge $3,100 in a more challenging environment,” he said. “In a more favourable environment for gold, it would barrel through $3,000, and not only challenge $3,100, but go in excess — $3,150, shy of $3,200 per ounce.”

When it comes to gold’s performance against equities, Shilling said that he predicts gold to surpass the performance of broad market indices like the S&P, but technology-heavy indices like the Nasdaq would likely perform better than gold.

“[When it comes to] gold and for example, the S&P, I would put my dollars on gold,” he said. “But if I had to bet against, say, the Nasdaq Composite, which includes that heavy tech sector, I think the Nasdaq has the opportunity to outperform gold.”

TECH:
DEEPSEEK’S RISKS TO TECH
Bradley Tusk, February 2, 2025

Chinese AI company DeepSeek’s recent challenge to American tech firms shows that markets were not pricing in the threat from Chinese competition, said Bradley Tusk, CEO of Tusk Ventures.

“The stock markets have not been completely rational about any of this for a while now,” he said. “The endless bull run on Nvidia, in my view, wasn’t totally logical… As we know, things always change.”

Tusk said that U.S. restrictions on exports of advanced AI chips to China had spurred innovation among Chinese tech firms, who had to “make do” with older chips.

“Ironically, it was our restriction in the first place that led to the Chinese innovations, if they are true and accurate,” he said. “I think as President Trump thinks about all of his different tariffs and trade policies and restrictions… be careful what you wish for.”

In general, Tusk said that innovations from Chinese firms like DeepSeek and AliBaba had been good for the tech sector.

“Ultimately for tech to work, it has to become commoditized, and the cost of operating has to be low enough that it can be done at scale, and so you want lower computings costs and less energy usage,” he said.

WHAT TO WATCH

Wednesday, February 19, 2025

Housing Starts — The number of new house construction projects started in the prior month.
FOMC Meeting Minutes — The minutes from the FOMC Meeting in January will be released.

Thursday, February 20, 2025

Leading Economic Indicators — The Conference Board’s Leading Economic Indicators for January will be released.

Friday, February 14, 2025

Existing Home Sales — Sales of existing homes will be released for the prior month.

The David Lin Report

Discussion about this post