JPMorgan Expects Trump to Tax 100% of Chinese Goods

As the White House refuses to let up on its protectionist trade policy, one team of analysts on the Street expects trade tensions to lead to higher U.S. tariffs on all Chinese imports, as outlined by Fortune

In a note to clients on Friday, JPMorgan analyst John Normand and his team wrote that while the forecast hike in levies on imported goods will do little to growth prospects in both the U.S. and China, it will send the yuan to its weakest level against the dollar more than 10 years. 

(See also: Where to Invest for a Trade War: Goldman's View.)

Dollar Becomes An Ever-Higher Yielder

"JPMorgan has adopted a new baseline that assumes a U.S.-China endgame involving 25% U.S. tariffs on all Chinese goods in 2019," wrote Normand. "A weaker yuan becomes part of the new equilibrium." 

JPMorgan expects The People's Bank of China to intervene with loose monetary policy in order to boost growth and hedge against trade war losses, yet does not foresee the government intervening significantly to offset downward pressure on the Chinese currency. 

As a result of Chinese policy, the JPMorgan analyst expects the U.S. dollar to "become an ever-higher yielder" versus the yuan for the rest of the cycle. The Federal Reserve's anticipated tightening of monetary policy should work to broaden the yield gap, wrote Normand. 

In June, JPMorgan analyst Marko Kolanovic estimated the cost of trade-related news flows at $1.25 trillion in lost market capitalization for U.S. companies, amounting to roughly two-thirds of the value of the total fiscal stimulus. 

Moving forward, trade tensions threaten to eat into profits of firms with substantial overseas businesses. Meanwhile, the news itself poses as a risk to markets, weakening sentiment and weighing on business decisions. 

Normand and his team suggested that the new baseline on the trade war "raises medium-term questions for the world's most-expensive equity market (U.S.) and one of its cheapest (China)." He added that U.S. earnings estimates could suffer from higher costs due to new tariffs, and as a result may trigger the "first earnings downgrades of Trump era." 

As for China, which has fallen into a bear market while the S&P 500 index rises to new highs, JPMorgan says its future relies on its success in ramping up consumption and supporting growth in key markets like technology and online retail. If the momentum lets up, "China assets could retain a risk premium for some time," wrote Normand. 

(For more, see also: Trump Trade Talk Has Cost Market $1 Trillion: JPM.)