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Are Banks Exposed to the Impending U.S.-China Trade War?
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Last week, President Donald Trump directed the U.S. trade representative to impose tariffs on nearly $50 billion worth of imports from China. Also, he plans to restrict new investments from the country and block Chinese takeovers of the U.S. firms. Things took an ugly turn with China planning to hit back with similar actions.
With a full blown trade war expected to happen, stock markets fell sharply. Over the past week, all three major indices — the S&P 500, Dow Jones Industrial Average and Nasdaq — fell 5.6%, 5.5% and 5.8%, respectively.
Similarly, all the sectors including bank stocks didn’t remain untouched. Notably, KBW Nasdaq Bank index tanked almost 8% over the last five trading days. Big banks — JPMorgan (JPM - Free Report) , Bank of America (BAC - Free Report) , Citigroup (C - Free Report) and Wells Fargo (WFC - Free Report) — lost 7.3%, 9.3%, 7.6% and 8.8%, respectively. Also, the Major Banks tanked 8.1% and Banks & Thrifts fell 7.3%.
Wondering why such a sharp fall in bank stocks, when they are not even expected to be directly hurt by the impending U.S.-China trade war? Well, before discussing the reasons for the decline, let’s first understand what led to the trade war and its implications, in brief.
President Trump has frequently accused China of unfair trade practices and theft of U.S. intellectual property. Hence, following a seven-month probe into the intellectual property theft, tariffs were imposed on China.
Subsequently, China announced a $3 billion list of U.S. goods that might be hit by higher tariffs. Despite the timing of the announcement, this was based on Trump’s imposition of higher tariffs on steel and aluminum imports earlier in the month.
Implications of Trade War & How Banks Might Be Impacted
The move to impose higher tariff on Chinese products and steel and aluminum imports is to protect domestic industries and safeguard jobs. Also, this fulfils one of President Trump’s major election promises of lowering America's huge trade deficit.
However, things could backfire.
According to Nobel Prize-winning economist Robert Shiller, the spike in trade tension between the U.S. and China will immediately result in an economic crisis. He further added that the U.S. companies will be at a loss if China cuts out their supply chains.
This could, therefore, turn into an alarming situation as the U.S. and global economic growth may slow down. Further, this could prompt other countries to raise import barriers and depress global trade.
In reality, no one wins in trade wars. Historically, imposition of higher tariffs led to slowdown in economic growth. Per the U.S. International Trade Commission, when President George W. Bush increased steel tariffs in 2002, the country’s GDP fell $30.4 million.
At present, entire economic picture looks grim. This will likely disrupt central bank policy, interest rates and inflation.
Of late, banks were looking forward to an improving economy, higher interest rates and benefits from lower tax rates. But with banks’ financial performance mainly tied with the country’s economy, they are expected to bear the brunt of the trade war to some extent.
Slowdown in economic growth and job losses may lead the Fed to lower the pace of interest rate hikes. Further, loan demand may falter. These are likely to lead to lower revenues for banks.
5 Medical Stocks to Buy Now
Zacks names 5 companies poised to ride a medical breakthrough that is targeting cures for leukemia, AIDS, muscular dystrophy, hemophilia, and other conditions.
New products in this field are already generating substantial revenue and even more wondrous treatments are in the pipeline. Early investors could realize exceptional profits.
Image: Bigstock
Are Banks Exposed to the Impending U.S.-China Trade War?
Last week, President Donald Trump directed the U.S. trade representative to impose tariffs on nearly $50 billion worth of imports from China. Also, he plans to restrict new investments from the country and block Chinese takeovers of the U.S. firms. Things took an ugly turn with China planning to hit back with similar actions.
With a full blown trade war expected to happen, stock markets fell sharply. Over the past week, all three major indices — the S&P 500, Dow Jones Industrial Average and Nasdaq — fell 5.6%, 5.5% and 5.8%, respectively.
Similarly, all the sectors including bank stocks didn’t remain untouched. Notably, KBW Nasdaq Bank index tanked almost 8% over the last five trading days. Big banks — JPMorgan (JPM - Free Report) , Bank of America (BAC - Free Report) , Citigroup (C - Free Report) and Wells Fargo (WFC - Free Report) — lost 7.3%, 9.3%, 7.6% and 8.8%, respectively. Also, the Major Banks tanked 8.1% and Banks & Thrifts fell 7.3%.
Wondering why such a sharp fall in bank stocks, when they are not even expected to be directly hurt by the impending U.S.-China trade war? Well, before discussing the reasons for the decline, let’s first understand what led to the trade war and its implications, in brief.
President Trump has frequently accused China of unfair trade practices and theft of U.S. intellectual property. Hence, following a seven-month probe into the intellectual property theft, tariffs were imposed on China.
Subsequently, China announced a $3 billion list of U.S. goods that might be hit by higher tariffs. Despite the timing of the announcement, this was based on Trump’s imposition of higher tariffs on steel and aluminum imports earlier in the month.
Implications of Trade War & How Banks Might Be Impacted
The move to impose higher tariff on Chinese products and steel and aluminum imports is to protect domestic industries and safeguard jobs. Also, this fulfils one of President Trump’s major election promises of lowering America's huge trade deficit.
However, things could backfire.
According to Nobel Prize-winning economist Robert Shiller, the spike in trade tension between the U.S. and China will immediately result in an economic crisis. He further added that the U.S. companies will be at a loss if China cuts out their supply chains.
This could, therefore, turn into an alarming situation as the U.S. and global economic growth may slow down. Further, this could prompt other countries to raise import barriers and depress global trade.
In reality, no one wins in trade wars. Historically, imposition of higher tariffs led to slowdown in economic growth. Per the U.S. International Trade Commission, when President George W. Bush increased steel tariffs in 2002, the country’s GDP fell $30.4 million.
At present, entire economic picture looks grim. This will likely disrupt central bank policy, interest rates and inflation.
Of late, banks were looking forward to an improving economy, higher interest rates and benefits from lower tax rates. But with banks’ financial performance mainly tied with the country’s economy, they are expected to bear the brunt of the trade war to some extent.
Slowdown in economic growth and job losses may lead the Fed to lower the pace of interest rate hikes. Further, loan demand may falter. These are likely to lead to lower revenues for banks.
5 Medical Stocks to Buy Now
Zacks names 5 companies poised to ride a medical breakthrough that is targeting cures for leukemia, AIDS, muscular dystrophy, hemophilia, and other conditions.
New products in this field are already generating substantial revenue and even more wondrous treatments are in the pipeline. Early investors could realize exceptional profits.
Click here to see the 5 stocks >>