The trade relationship between the US and China sharply worsened this month, effectively restarting the recent trade war after a brief period of détente.

The recent escalation was sparked by aggressive actions from both sides after China unexpectedly expanded its export controls on rare earth metals (essential for manufacturing everything from EVs and smartphones to advanced semiconductors and military equipment) and related technologies. Beijing justified this as a move to safeguard national security and protect its supply chains.

The new rules require companies worldwide to seek approval from Beijing to export products made in China that contain even small amounts of rare earths. China also launched an antitrust investigation into a US chipmaker and imposed extra port fees on US-linked vessels, mirroring US measures.

US President Donald Trump responded quickly on October 10, announcing a significant tariff increase effective November 1, or sooner, depending on China’s response; the US has threatened to impose an additional tariff on all Chinese imports, “over and above” any tariffs already paid, pushing the total tariff on some Chinese goods to 130%.  The US also announced it would implement export controls on “any and all critical software” starting November 1.

A previously scheduled meeting between Trump and Chinese President Xi Jinping on the sidelines of the upcoming APEC summit in South Korea has been thrown into doubt. However, US Treasury Secretary Scott Bessent says negotiations are “back on track” and the tariff “does not have to happen,” suggesting the threats are mostly for negotiation leverage.

The threat of a full-scale trade war unsettled Wall Street, leading to sharp sell-offs in the days immediately following the October 10 announcement, wiping out a large portion of the 7.5% collective gains the US indices made during the high-performing September period.

The sector that led the entire market higher was the one most affected, reflecting its deep exposure to global supply chains and the Chinese market. The tech-heavy NASDAQ fell 3.6%, marking its worst day since the initial tariff shock earlier in the year, while the broader S&P 500 dropped 2.7% – both had their best monthly performance in 15 years just weeks earlier. The “AI mega-cap” stocks Nvidia (down 5%) and Advanced Micro Devices (-7.8%), plus Amazon (-5%), which is exposed to tariffs and supply chain disruptions, all suffered significant losses.

The market rebounded strongly at the start of this week after Trump used social media to tone down his rhetoric, saying, “Don’t worry about China, it will all be fine!” This volatile pattern is often called the “TACO Trade” (Trump Always Chickens Out), reflecting investor belief that aggressive threats are often just bargaining tactics. However, stocks have since fallen again, indicating that the high-tech sector remains highly sensitive to ongoing rhetoric and the looming November 1 tariff deadline.

Nonetheless, fundamental bullish drivers, such as the US Federal Reserve’s September rate cut and the AI theme, continue to support the markets, leading to elevated volatility rather than a complete collapse.

Economists warn that ongoing and escalating tariffs will serve as a significant headwind to global growth, with the full impact of existing and new tariffs yet to be felt by consumers and businesses. China’s September exports to the US already fell sharply.

European markets showed respectable returns in recent weeks, with the FTSE 100 rising 1.8% and the pan-European STOXX 600 up 1.5%. However, bullish macro sentiment in Europe largely faded over the past month. The lack of a significant German fiscal stimulus led to some profit-taking. Despite reaching an all-time high in early September, the Euro’s strength against the US dollar continued to challenge earnings for Europe’s export-driven multinationals.

Emerging markets performed strongly, with the MSCI index rising 7.2% in September. The dovish shift by the US Fed was a significant tailwind, encouraging substantial capital inflows and a rise in EM currencies against the US dollar.

Chinese stocks continued their strong run, boosted by optimism that central government stimulus measures would effectively counter the impact of US tariffs and the prolonged weakness in the residential property market (see more below). The Shanghai Composite rose into mid-October. Technology stocks remain key in the regional rally, with shares in China, Taiwan, and South Korea reflecting optimism related to AI

The environment of lower global interest rates and sustained earnings growth in the US and emerging Asia remains generally positive for Australian investors with international exposure. However, the AUD’s tendency to strengthen in a “risk-on” environment and against a softer USD will dilute returns for unhedged global investments.

Pulling profit emergency triggers

Earnings season is when most public companies release their financial results and dividend plans. It can also be a volatile period for share prices, depending on whether companies impress or disappoint investors.

Everyone—shareholders, analysts, financial advisors, media, and investors—can evaluate whether companies are reaching their potential. Have they hit sales targets? Is gross profit increasing? What about net profit? Are margins widening?

Most Australian companies have balance sheets on 31 December and 30 June, with ASX reporting seasons in February and August. However, major banks typically have balance sheets as of 31 March and 30 September, publishing their results in May and November.

Scott Phillips, from the market investing news outlet The Motley Fool, enjoys reading the tea leaves during these reporting months. We thought his recent thoughts were worth sharing.

Phillips noted the ASX recently saw high-profile layoffs at Atlassian, CBA, ANZ (up to 4500 employees), NAB, Westpac, and BHP (closing a Queensland coal mine)

He noted many public companies reported modest sales growth last earnings season but faced significant cost increases, squeezing their profits. When growth isn’t enough to offset margin pressures, they resort to cost-cutting.

It’s easier to justify job cuts when others are also doing so. Additionally, many pandemic hiring decisions are now being reconsidered as the business environment stabilises and customer patterns return to normal.

And that’s where recent inflation data comes into play. On one hand, the Australian economy is growing, and household spending is increasing. On the other hand, the underlying inflation rate (excluding volatile items and holiday travel), released in late September, rose to 3.4%, up from 3.2% in August. If your costs go up by 3% (the headline rate), but your sales grow less, you’re squeezing your margins—something no CEO wants to share with shareholders.

The bottom line is that Phillips warns there will be more job cuts from corporate Australia in the coming months, as the headline rate continues to rise.

As an investor, Phillips says he’s wary of businesses that can’ t grow quickly enough to cover their rising costs and those sectors or companies that lack pricing power. If you can’t raise prices or sell more, or both, you’re in trouble.

He cites Myer as an example. Recent figures show its sales increased by 0.5% on a like-for-like basis, but underlying profit fell 30%. Where will Myer find more costs to cut or ways to boost its sales? It hardly has any sales staff left and has drastically cut its in-store shopping experience.

No doubt the RBA will take all of this into consideration at their next meeting.

That’s the average balance of self-managed superannuation funds in Australia, according to recent data for the year ending June 30, from SMSF accounting software provider Class.

The number of SMSFs is increasing at the fastest rate in eight years, as those still working seek more control over their retirement savings. The combined value of SMSFs is estimated at $1.05 trillion.

The rise in balances also shows how the sector is likely to bear the burden of the government’s proposed new tax on higher super balances. Class estimates that the sector alone could generate around $3 billion in revenue if the tax proceeds – $700 million more than the government’s estimate for the entire super sector in its first year of operation.

The data shows the remarkable growth in the sector from $890 billion two years ago, at the expense of industry super funds.

“It probably also reflects this sense of people increasingly wanting to take control of their superannuation,” Class chief executive Tim Steele said in an interview. “They might be a little disenfranchised, perhaps with other alternatives in the market, and being able to take control of your super is one of the key drivers we know of why people would establish (an SMSF) in the first place.”

“Everything’ s in play once you hit retirement,” said Angus Woods, whose company, Adviser Ratings, assesses financial advisers. That’s when advisers and accountants are “starting to look at transitioning their clients or their members out of a superannuation accumulation fund and onto “platforms” used by retail funds or SMSFs.

“Our data suggests that advisers will have about 30 per cent of their clients in SMSFs. As more and more retire and move out of industry funds, even if that amount stays static at 30 per cent, the funds under management will just grow in terms of quantum.”

About 42,000 SMSFs were established last financial year, up from 33,000 the year before. The most significant growth – 49 per cent – was driven by people aged 45 to 59, followed by those aged 30 to 44, at 37 per cent. This reflects the growing engagement with wealth creation over those ages.

Chart of the Month

We were struck by this recent chart from JPMorgan, which shows the collapse in investment in China, particularly in its housing sector

With property accounting for about 70% of household wealth in China – the largest asset for the average family – the property downturn, which has continued since 2021 following a COVID-19 peak, has significantly diminished household wealth and discouraged spending, as households prefer to pay down their mortgage debt.

The crisis was triggered by the Chinese government’s “Three Red Lines” policy in 2020, which set strict limits on developer borrowing by capping debt-to-cash, debt-to-assets, and debt-to-equity ratios.

Hardest hit was one of China’s largest and most indebted property developers, Evergrande, which had grown aggressively by leveraging massive debt and relying on property pre-sales to fund construction. By the end of 2021, its total liabilities had reached a staggering 2.58 trillion yuan (approximately $US360 billion), equivalent to 2% of China’s GDP. Unable to generate enough cash from sales or secure new financing, the company officially defaulted on an offshore bond in December 2021.

Evergrande’s failure sparked a crisis of confidence that quickly spread through the property sector, causing defaults and liquidity problems for other major developers, which then led to their collapse, leaving a large surplus of unsold or unfinished housing stock nationwide (below).

The real estate sector accounted for 25% of China’s GDP and was a key source of revenue for local governments through land sales, a system now under review due to the severe fiscal distress. The collapse has caused significant economic and social damage: China’s overall economic growth has slowed significantly from its previous pace, and the crisis has deterred foreign direct investment into China, signalling a broader crisis of confidence in the Chinese economy. Property values continue to trend down, and new housing sales remain in decline.

The Chinese government has favoured a cautious and complex, multi-pronged approach to stabilising the sector, rather than a large bailout. Since last year, it has permitted local governments and state-owned enterprises (SOEs) to access central bank funding to buy unsold homes from troubled developers and convert them into affordable housing.

Lurking in the background are also key demographic issues – China’ s ageing population and sluggish household formation, a legacy of its infamous One Child policy: four grandparents are supported by two adult children, who in turn are supported by one millennial.

The crisis has also spread beyond China’s borders, with several large Chinese-backed real estate developments in the US faltering, including a $US1 billion three-tower project in Los Angeles, and another in New York, with hundreds of millions owed to creditors.

Ten years ago, China’s property market bubble was viewed as unstoppable and unlikely to burst, but that has clearly not been the case. Chinese observers agree it will take another decade to recover from the property crisis, and there will be no return to the rapid borrowing and expansion of the past.

Insurance never pays?  Think again

Most of us have insurance cover for our car, health and home, but few bother with many other forms of protection, believing it’s not worth it.

Financial advisors think otherwise because we focus on managing risks as well as maximising returns. The key purpose of life insurance is to manage risk, which could take the form of interrupted cash flow, tax obligations, debt, estate administration, asset division, business ownership transfers, or any other financial transaction. Any good financial advisor will tell you that each category of assets in your portfolio serves a different purpose in creating and sustaining your wealth.

Life insurance, for example, is a unique asset with distinct liquidity, taxation benefits, and performance. Unlike shares, bonds, property, and most other assets, life insurance is not exposed to creditors’ claims upon your death.

AIA Australia recently published its 2024 claims data, showing that the total claims it was paying out had risen significantly. In 2024, they paid more than $2.6 billion to over 33,000 customers, averaging out to over $51 million per week. Of that total figure, $862 million was paid to Australians whose claims were made through their financial advisors.

Cancer accounted for the majority of AIA Australia’s death and crisis recovery claims, followed by cardiovascular conditions. Mental health was the leading cause of claims for income protection policies, followed by musculoskeletal conditions.

This graphic from AIA Australia shows how many of its claims were distributed:

Friday Funny