Early Morning Financial News Analysis

Introduction

Good morning, valued investors! It's 8:32 AM on Friday, April 11, 2025, in Taipei. I'm Yu Ting-hao, and I'll be here with you for the next half-hour, providing insights into international financial news and market trends before the opening bell.

The US-China Trade War Escalates

Tariffs and Market Impact

The trade war between the US and China continues to intensify. The US has increased tariffs on Chinese goods to as high as 145%, a 20% increase from yesterday. In a CNBC interview, then US president indicated that there's still room to increase the total tariff rate for China. This announcement triggered a sharp sell-off in the US stock market yesterday.

Market Volatility and Capital Flows

While the US stock market has seen impressive gains, these levels are susceptible to profit-taking and corrections. The market is currently undergoing a significant reshuffling of positions. Analyzing margin balance data from the Taipei stock market, alongside activity from US hedge funds and value investors, indicates new participants entering the market while others exit. This turnover warrants close observation. The daily volatility of thousands of points is challenging for many investors.

Trump Era Market Fluctuations

Notably, nine of the ten largest historical single-day declines in the Dow Jones Industrial Average have occurred during then President's tenure, including significant drops on:

• March 16, 2020
• March 12, 2020
• April 4, 2025
• March 9, 2020
• June 11, 2020
• April 3, 2025
• March 11, 2020
• March 18, 2020

These fluctuations underscore the magnified impact of then President's policies on the US stock market. This period is characterized by extreme volatility, with capital seeking to escape while others aim to enter.

Analysis of US Tariffs and Liquidity

Tariff Revenue and Potential Tax Cuts

Currently, the US levies a 10% tariff on global imports. Based on last year's nearly \$3.2 trillion in import value, this equates to roughly \$320 billion in tariff revenue this year. While then President has postponed equivalent tariffs for 90 days, this move primarily addresses two immediate liquidity concerns: supply chain and financial market liquidity.

Supply Chain Liquidity

Factories are scrambling to fulfill orders with the prospect of further tarrifs. Taipei stock market's revenue is expected to be explosive. American companies are placing urgent orders to maximize shipments to the US market as quickly as possible.

Financial Market Liquidity

The recent significant drop in US Treasury bonds was partly influenced by then President's willingness to ease pressure. However, a rapid market decline can also trigger liquidity panics that policy easing alone may not resolve. The US Financial Stress Index is approaching levels seen during the tail end of the 2022 bear market.

Geopolitical Implications and Supply Chain Shifts

US-China Decoupling and Global Reactions

The US-China decoupling continues to progress. The adjustments to equivalent tariffs in the Chinese market and the reactions of various countries are noteworthy. Countries like Vietnam, Japan, and even the EU have agreed to suspend US steel and aluminum tariffs for 90 days. This effectively isolates China as the primary target in the US tariff strategy.

China's Response and Impact

China's ability to reduce its trade deficit to alleviate the tariff conflict is limited due to the vast difference in import/export volumes and its production capacity. The US imposed tariffs in five phases:

1. February 4: US imposed 10% on Chinese imports; China imposed 15% on US LNG and coal.
2. March 4: US increased tariffs to 20%; China imposed 15% on US soybeans and corn.
3. Early April: US increased tariffs to 34%; China increased tariffs to 30%.
4. April 7-9: US and China both increased tariffs to 50%.
5. After the fifth wave, conditions spiralled.

China has ceased announcing further responses, while the US has escalated tariffs to nearly 150%. This development poses a significant challenge to US-China economic relations, especially for companies with substantial manufacturing operations in China. The mobile phone and electronic component sectors, led by Apple's iPhone, are among the most affected.

Rare Earth Exports and Semiconductor Concerns

The Chinese government has initiated a new wave of restrictions on rare earth exports, including seven rare earth elements in the list on April 4th. This week, approximately 80% of rare earth exports to the US are expected to be suspended, potentially impacting companies with strong ties to the US, including Taiwanese, Korean, and Japanese manufacturers. This could affect the electric vehicle (EV) motor industry and the production of high-performance magnetic materials. China holds a significant share in both rare earth production and the post-processing stages.

Impact on Taiwanese Companies

While concerns arise about the semiconductor industry's future, TSMC's (Taiwan Semiconductor Manufacturing Company) revenue for March was strong, and is expected to be even stronger in April, May, and June due to urgent orders. The US is prioritizing building its own supply chain in the face of this.

East Asia's Export Dynamics

Shifting Export Focus

The dynamics of East Asian exports to China and the US have shifted significantly. When then President initiated the US-China trade war in 2016, Asian countries reduced exports to China while increasing exports to the US. However, during the COVID-19 pandemic and under the Biden administration, China experienced a surge in capital inflows. This trend reversed in 2022 and 2023 due to Biden's technology war, leading to a reallocation of funds back to the US.

US Efforts to Revitalize Manufacturing

Then President has signed an executive order aimed at revitalizing the US shipbuilding industry, which is currently concentrated in China (approximately 70% market share). To reduce reliance on foreign supply chains, the US needs to collaborate with Asian allies by encouraging them to establish factories in the US. This aims to secure the supply chain in case of conflict in East Asia. However, the US shipbuilding industry faces challenges like lower capacity, outdated technology, and high costs. This may lead to pressuring companies in South Korea to set up factories in the US to ensure supply chain security.

Trump's Policies and Their Effectiveness

Policy Implementation and Focus

Changes in the market are heavily influenced by President's statements and tariff policies. While analyzing the president's intentions may seem futile, it is essential to understand the consistent implementation of high-intensity policies. However, not all policies have been successful. There are many examples of policies that never reached fruition:

• Ending the Ukraine-Russia war in 24 hours.
• Implementing a \$500 billion mining agreement in Ukraine.
• Establishing a government efficiency department to reduce \$2 trillion in spending.
• Cutting military spending by 8%.
• Acquiring Greenland.
• Reclaiming the Panama Canal.

Focus remains on the progress of the tariff war. It is worth noting that there is not more global peace.

Unresolved Conflicts

While the focus is on the US-China tariff war, the conflict in Ukraine continues. The Ukrainian army is experiencing significant setbacks due to the interruption of US military aid, with satellite support now primarily coming from Europe. Additionally, a growing number of North Korean soldiers are participating in the conflict on the Russian side, employing tactics of relentless assault.

Potential Tariff Benefits and Economic Impact

Tax Cuts and Economic Growth

The market is closely watching for the potential release of tariff-induced benefits, such as tax cuts. President has indicated the possibility of a Republican tax cut plan, potentially reducing taxes by \$4.5 trillion over ten years. This aims to extend the Tax Cuts and Jobs Act of 2017. The goal is to expand the economy of the US by tariffs and reduced taxation.

Rationale Behind Aggressive Policies

President's confidence in pursuing aggressive policies stems from the current state of the economy. The absence of stagflation risk is notable, as the primary concern is potential deflationary recession. Recent inflation data shows a decrease to 2.4% annually, with the core CPI rising only 0.1%, resulting in an annual increase of 2.8%. The US Federal Reserve will have to see what these developments mean.

Employment Market Stability

The weekly jobless claims data reflects the stability of the employment market, although there have been layoffs. The high volume of homes for sale in the Washington D.C. area is due to government layoffs. It shows that the cuts are simply from the efficiency department.

Recession Concerns

Goldman Sachs briefly issued a report suggesting that the US would enter a recession, with the severity depending on the level of additional tariffs beyond the 10% baseline. This report was retracted shortly after due to then Presidents decision to suspend tariffs for 90 days.

Market Performance

The Dow Jones Industrial Average fell 1,014 points (2.5%) to close at 39,593. The S&P 500 fell 188 points (3.46%) to close at 5,268. The Nasdaq fell 737 points (4.3%) to close at 16,387. The Philadelphia Semiconductor Index fell 337 points (7.97%) to close at 3,893.

Investment Strategies and Market Wisdom

Long-Term Investor Challenges

Long-term investors face the challenge of navigating external systemic shocks. Whether to be bullish or bearish is difficult. This is because no one know what then President will do. Investors should be consistent with their investment strategy.

Market Parable

A church stood across the street from a house of ill-repute. The preacher asked God to strike the ill-repute house with lightning. Lightning struck the house and burned it down. The owner of the house sued the church. The judge said it was odd to find the brothel owner believed more in prayer than the preacher did.

The Value of Belief

External shocks will disappear after 90 days or 4 years. Investors must believe in what they are doing. Internal shocks affect investor mentality, while external shocks disrupt markets on a short-term basis, whereas longer-term challenges come with things like inventory management.

The Potential Economic Disconnect

China vs. East Asia

There will be an economic disconnect. The economy of East Asia will likely improve in the coming months, whereas the economy of China will be impacted. Both China and East Asia will see a jump in orders due to tariffs. There is a possibility that China will be further tariffed.

Taiwan

Taiwan's economic outlook is extremely positive. Electronic products are in short supply.

Taiwanese Manufacturing

Taiwan's manufacturing inventories are low, so companies will be incentivized to re-stock, especially to circumvent a possible tariff. The economy is poised for a short-term surge.

Book Recommendation: "An Introductory Class of Macroeconomics by a Professor from Tokyo University"

Book Summary

The author discusses what economics is from his point of view. It is a simplification of history via charts and other graphical data. History is always a good vantage point from which to analyze and approach different problems.

Author Credentials

The author of the book, Toshihiro Inohori, was born in 1952 in Okayama, Japan. He is an honored professor from Tokyo University.

Closing Remarks

Understanding macroeconomics and using it to improve investment strategy is one thing; however, understanding the world at large and viewing the world through multiple dimensions will do well for overall understanding.