It is tempting to dismiss the decline in US equity markets since the July 26th peak (6.0%) as largely just another US – China trade-related correction. So far, the fall in the S&P 500 has been less than in previous sell-offs, when trade tensions have erupted.
But the gloves are off. The Xi administration may well believe China is strong enough to withstand further US export restrictions. Huawei is moving ahead of US (and South Korean) competition. The development of new in-house chips puts the world’s number 2 manufacturer of smartphones ahead of Apple and Qualcomm. Even Alibaba “has unveiled its first self-designed chip using ‘open-source instruction set architecture.’”
Nevertheless, the latest trade spat and the devaluation of the Renminbi comes at an inauspicious moment for US equities. Recent BEA revisions point to a significant drop in profit margins, for the non-financial domestic corporate sector at least. If US companies are struggling to maintain margins because the economy is moving quickly towards full employment, then a currency war will be damaging for US equities.
