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Last week, I covered the shots across the bow from both the United States and China in the growing trade war. Today, I'm going to take a deep dive into both parties' next moves and how the markets would inevitably react.
With the mid-term elections coming up in November, it looks like the Chinese are cleverly exerting pressure directly on the president and the Republican Party.
In a deft political move, the Chinese are targeting U.S. products coming out of "red" states. Specifically, they are going after products made or grown in counties that voted for Donald Trump for president.
That's putting pressure on Trump supporters, who are now at odds over losing income and jobs and still believing in the president's agenda and politics.
And that's not the only curveball China will be lobbing at the United States.
Here's what could happen next and how to protect yourself when these warning shots turn into all-out war…
What Could Send Markets into Free Fall
Optimistic investors still believe that pressure will level off as President Trump slows down tariff talk against the Chinese until after the election. Their belief is that no bad news on tariffs is good news for stocks, and they're right.
The shock to come may be what the Chinese call "the biggest trade war in history" escalating and not ratcheting down.
If President Trump doesn't relent, Beijing has threatened to swamp U.S. firms operating there with red tape, including using a weaker yuan as a weapon.
Ironically, the Chinese currency has been falling relative to the dollar. That makes Chinese exports cheaper to buy for U.S. importers. That usually stimulates exports from China to the United States and will add to tensions between the two countries.
"The longer the spat drags on, the harder it will be to unwind," says Bill Reinsch, senior adviser at the Center for Strategic and International Studies.
"While the short-term damage of the tariff back-and-forth isn't too painful, the cumulative impact is significant," he said, adding that he foresees "a long-term dispute, not a quick resolution."
Trump "only has one strategy, which is to hit harder," Reinsch said. "It's like two 8-year-olds having a staring contest."
The prospect of a protracted trade war will eventually weigh on equities, while the lobbing of any tariff nukes would instantly upend investor optimism and take stocks down to test their support level lows.
If they break those support levels, market losses could be steep and swift.
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Investors and traders have been counting on those support levels, while at the same time preparing to exit positions if they're broken to the downside.
Any steep market sell-off would panic so-called passive investors into turning active and selling packaged products with all the high-flying stocks in them, specifically index ETFs.
Get Ready – While You Still Can
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
He helped develop what has become known as the Volatility Index (VIX) - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of 10X Trader, Shah presents his legion of subscribers with the chance to earn ten times their money on trade after trade.
Shah is also the proud founding editor of The Money Zone, where after eight years of development and 11 years of backtesting he has found the edge over stocks, giving his members the opportunity to rake in potential double, triple, or even quadruple-digit profits weekly with just a few quick steps.
Shah is a frequent guest on CNBC, Forbes, and Marketwatch, and you can catch him every week on Fox Business's "Varney & Co."
He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.