This month is arguably the most important to ASX investors compared to Junes of years past as it will have a big impact on how the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index trades into the new financial year.
It's nice to see the top 200 stock benchmark jump more than 1% to a fresh eleven-and-a-half year of 6,526 this afternoon but the optimism seems somewhat at odds with key deciding factor for global equities, which is due only at the end of this month.
This seminal moment is the G20 meeting in Japan on the 28th and 29th of June where US President Donald Trump said he will decide on whether to proceed with slapping tariffs of at least 25% on all Chinese goods imported into the US.
At crossroad between recession and recovery
Trump threatened to "immediately" impose the new tariffs on US$300 billion of Chinese imports that aren't currently taxed if Chinese President Xi Jinping doesn't meet him on the sidelines of the G20 summit, an annual forum between the biggest 20 world economies.
If Trump carries out his threat, the world's two largest economies are likely slip into an all-out trade war that will force other countries, like Australia, to pick sides. I believe it will be hard for Australia to avoid a recession under such a scenario.
This is why it's curious to see the ASX 200 hit a fresh decade high today as it tells me that investors are not worried about the outcome of the Trump-Xi G20 meeting. I believe there's an air of complacency in the market that is probably blinded by hopes of interest rate cuts.
Zero rates can't save a bull
But even if the Reserve Bank of Australia (RBA) were to cut rates to zero, it probably won't be enough to keep our economy from contracting. The latest weaker-than-expected GDP figures highlights the danger as our economy is already slowing notably even without an all-out trade war.
I think Trump will back away from pulling that trigger at the end of this month as both sides have already made preparations for the leaders to meet before Trump's latest threat, but I doubt the two adversaries will make much headway in reaching an agreement.
But if hubris prevails over logic and the US and China move to tighten the noose around each other's necks, ASX listed stocks with operations in both countries or that are leveraged to global trade will probably be among the first to feel the choke.
Stocks most impacted by trade war
One such stock is logistics group Brambles Limited (ASX: BXB) as demand for its services will suffer if global trade slows.
Another that could feel the heat is Treasury Wine Estates Ltd (ASX: TWE). While a slowing economy will generally hurt demand for its top selling (and upmarket) products, the group has US-made alcoholic products that Chinese authorities could tax if they took a reciprocal responds to Trump.
US-headquartered medical device maker RESMED/IDR UNRESTR (ASX: RMD) could also be caught up in the trade war crossfire given that China is a key growth market for ResMed.
Until we get a better handle on the outlook for global trade, ASX investors should temper their bullish view on equities.
