This is what the next phase of Trump’s trade war could look like

Optimism is creeping back into the market today with the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) defying a negative lead on Wall Street as investors await the next phase of the global trade war.

The top 200 stock benchmark is trading 0.7% higher during lunch time trade with defensive healthcare stocks like Sonic Healthcare Limited (ASX: SHL) and CSL Limited (ASX: CSL) frontrunning the rally.

But the next market meltdown may only be a tweet away with US President Donald Trump considering slapping tariffs on a further US$200 billion of Chinese imports and as China prepares a retaliatory response.

It isn’t all bad news though. In fact, I suspect the next stage of the global trade spat could see our market jump higher.

This is because I think Trump will impose fresh tariffs on Chinese imports worth well under the US$200 billion he has flagged. The second round of tariffs could even be less than half of this number and that will bring some sense of relief among investors – until or unless we get a third round, but we’ll worry about that another time.

Such a tactic would suit Trump’s bellicose negotiation style and could even prompt the Chinese to take a much softer response to the new trade challenge.

Such an outcome will allow Trump to claim victory – something he couldn’t quite do when he imposed the first round of tariffs against China, as the Asian giant returned the serve with the same gusto.

While that is good news for risk assets, the stocks that are more likely to do well are those that can benefit from a weakening Australian dollar. The Aussie could enjoy a bump-up if the trade war risks recede, but its downtrend is likely to remain intact with the widening interest rate gap between the US and our nation.

The greenback could be further bolstered by this week’s inflation reading with economists bracing themselves for higher-than-expected price pressure in the US economy.

The trade tiff with China will only amplify the pressure. Even if he does scale back on the second round of tariffs, American consumers could still end up paying more for a wide range of goods that may include auto parts, food ingredients, construction materials and furniture, to name a few.

This leaves the Aussie on the back foot, but that should benefit some companies like cement supplier Adelaide Brighton Ltd. (ASX: ABC) as the weaker local dollar will help it better compete against import competition, which is usually priced in US dollars.

Another stock that will benefit from the exchange rate is plumbing products supplier Reliance Worldwide Corporation Ltd (ASX: RWC) as it has a large presence in the US market, while a host of local miners like Independence Group NL (ASX: IGO) and OZ Minerals Limited (ASX: OZL) will benefit from the currency translation as commodities are priced in US dollars, while their cost base is denominated in the Australian dollar – assuming commodity prices don’t fall off a cliff.

There’s another stock that is well placed to keep running ahead too. The experts at the Motley Fool believes the stock’s surge in FY18 will continue into this financial year.

Click on the free link below to find out what this stock is.

The ASX small cap up 285% with no sign of stopping...

One Australian company has developed a state of the art device that's revolutionizing hospitals all over the world. Even better, this device is so profitable that the company rakes in 90% margins. That's a lot of cash. So no wonder the stock's up 285% since 2008 – with no signs of stopping...

To discover the name and code, simply click the link below. You'll discover our expert's #1 medical technology pick... and you can decide for yourself whether to get invested today.

Click here to claim your free report.

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.