This past Tuesday, international markets tanked after U.S. president Donald Trump made a tweet saying that he would raise tariffs on $200 billion worth of Chinese goods from 10% to 25%. The tweet most severely impacted tech stocks like Apple, which depends on Chinese manufacturing. However, the impact of the tweets was felt far beyond the U.S. tech sector or the U.S. in general. Almost all international markets fell on the news, including the TSX, which slid 0.82%.
Although the TSX’s losses on Tuesday were minor compared to those seen in the U.S. and China, they were significant enough to cause some alarm. Additional U.S. tariffs on China could have spillover effects for all countries, and continued sabre rattling from Trump could have a chilling effect on Canadian exporters.
As of Wednesday, Trump appeared to back down on his statements, saying that he was “happy” with the tariffs already coming into U.S. coffers. However, the same tweet contained antagonistic language toward China, which raises the possibility of continued trade tension. It’s very likely that any further tension of this short would negatively impact the TSX Index. To see why that’s the case, we need to look at why the TSX got hit so hard on Tuesday.
Why the Canadian markets tanked
On the surface, it doesn’t look like U.S.-China tension has much to do with Canada. However, looks can be deceiving. Canada is massively dependent on its trade partner to the south, as 20% of its GDP comes from exports to the U.S.
This reality can easily be seen in the operations of Canadian businesses as well as in economic data. It’s hard to think of a publicly traded Canadian company outside of banking that doesn’t export to the U.S. If Canadian goods are hit with tariffs, then many Canadian stocks will suffer.
So, if you hold a TSX index fund like iShares S&P/TSX Capped Composite Index Fund (TSX:XIC), your holdings would very likely hit by Trump slapping tariffs on Canada. This index fund, which mirrors the S&P/TSX Composite Index, is highly weighted in energy, materials and bank stocks. Energy and materials companies basically depend on U.S. exports to survive, while bank stocks are increasingly growing their presence in the states as well. So, Trump’s China threats are relevant to the TSX to the extent they signal that Trump’s China tariff spree could spread to Canada.
Buffett called sell-off “rational”
In an interview on the subject, Warren Buffett said that Tuesday’s market selloff was “rational” and that Trump’s proposed actions would be “bad for the whole world.” This is significant because Buffett rarely views short-term market swings as significant. The fact that he’s calling this most recent one rational means he believes that the economy and, by extension, stock fundamentals, would suffer from Trump’s proposed actions. This suggests that continued Twitter sabre rattling from the president would not be good for the TSX Index — or any index for that matter.
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Fool contributor Andrew Button has no position in any of the stocks mentioned. David Gardner owns shares of Apple. The Motley Fool owns shares of Apple and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple.
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