Trump tariffs, China and chips

Market Recap

• The S&P 500 slipped 1.5%, with technology and consumer discretionary down more than 3% each. From a technical perspective, the 50-day moving average has now sunk below the 200-day average in the dreaded ‘death cross’ even as markets have stabilized.
• The TSX outperformed on the week, adding 2.6% with gains across all major sectors. Health care led, up 5.2%, while energy and telecom rose more than 3%.
• Canadian moving averages haven’t yet crossed over, but the index is now running into the 200-day average from below.

China

Although the U.S.-China trade war escalated in recent weeks, the confrontation now looks closer to what we imagined it would be. The focus has narrowed from its global scope to this one particular relationship—at least with regards to reciprocal tariffs—and both countries are trying to top each other by continually raising import duties. In our view, this strategy quickly reaches diminishing returns. Once you have made trading prohibitively expensive for businesses, it ceases to matter whether the tariffs will be 150% or 500% because there’s no marginal benefit to increasing them. Corporate leaders have, in all likelihood, already suspended investments and looked for alternatives. We do believe both sides want a deal though, as it’s in their common interests—however, no one wants to appear like they are caving, and as such a standstill could be prolonged. China has also sought greater divergence from the U.S. in recent years, and that pivot is likely to accelerate given the situation. While the focus on China is positive for most other countries, in the sense it provides the U.S. an incentive to reach individual deals and consolidate support, there are some difficulties. Vietnam is a good example. It ranked fourth for the biggest U.S. trade deficit in 2024, and accounts for nearly one-third of U.S. footwear and a key source for Nike, Lululemon, and Adidas, to name a few. They certainly want to sign an agreement, but insistence on isolating China could be a problem since that’s the source of many of input materials. Companies can look for new supply chains, of course, but some connections will be harder or far costlier to replace than others.

Bottom line: Although the standoff is unlikely to worsen, a compromise remains elusive given that neither side wants to be perceived as yielding.

Chips

The semiconductor industry was shaken last week when the Nvidia CEO Jensen Huang warned that his company would take a $5.5 billion write down this year owing to restrictions on selling artificial intelligence microchips to China.¹ Around the same time, ASML Holding NV reported that first quarter orders were €1 billion less than expected.² Its share price fell as much as 7.6% after the announcement, mostly on tariff-related forward guidance. The average price target for TSMC, another major chipmaker, also dropped by 9% this month.³ It’s been a rough period for the industry—and though we could see delivery volumes adjust to the new status quo, it’s important to maintain perspective. China still ordered mass shipments of AI chips in anticipation of the tariffs, which provides immediate revenue.

Bottom line: Rather than being purely reactive, investors should consider the recent volatility in context of the long-term AI chip demand.

U.S. dollar

Another unintended consequence of the tariff debacle has been the backward slide of the U.S. dollar. Typically considered a safe haven when markets are in crisis, the U.S. dollar has actually declined during the recent turmoil because investors have less confidence in U.S. leadership. For the first time since the early days of the 2008 financial crisis, the dollar has lost some of its luster. Will this trigger a switch in the world’s reserve currency? We believe this is too early to tell, because the loss of confidence is so tied to the current regime—the next Administration may have drastically different policies. For the immediate future, however, our outlook is for a weaker U.S. dollar. It has already declined against the CAD, and although it’s currently strengthening against the Chinese yuan, one year from now we would expect it be lower relative to a broader basket of currencies. That being said, for the medium to long-term, a currency depreciation must be tied to a material deterioration in the economy and the strength of the country relative to other nations. The entire point of Trump’s trade war is to pressure other counties to buy more U.S. goods—and in order to do that you have to buy more U.S. dollars. Investors worried about currency implications should watch the fine print of these agreements to see how much they mandate the buying of U.S. manufactured goods, as that could create a tailwind for the greenback moving forward.

Bottom line: The U.S. dollar will likely pare back this year, but if the U.S. economy remains strong over the long term, the USD will as well.

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Originally Posted April 21, 2025 – Trump tariffs, China and chips