Different asset classes, and even securities within the same asset class, are pricing-in varying degrees of trade war risk. To understand the degree to which the market is pricing-in trade war concerns, we looked for common patterns in trade-related securities, and then stripped out cyclical and liquidity influences, to arrive at a metric for quantifying trade fears. We found that market concerns are at a mid-point, just over half-way between the peak levels of worry last year, when 25% tariffs were still a threat, and pricing no trade risk at all.
Quantifying 'market' impact with the UBS Synthetic Trade War Monitor
Over the last 12 months, nearly 70% of the variation in market prices has been down to the two factors that regularly impact earnings and cost of equity – growth and liquidity. In other words, only around 30% of the variation in trade-sensitive assets has been driven by the trade conflict. To the extent that the trade war has had an impact on prices, the market is just over halfway between complete complacency and last year's levels of peak fear.
Important conclusions and surprising results across individual assets
In terms of the impact on asset classes, US assets, particularly equities and fixed income, have been penalised more by trade tensions than those in the rest of the world. The same goes, to a lesser extent, for Chinese assets. Euro-area stock markets have been less impacted by trade than US equities: index underperformance in Europe reflects a slowdown in growth driven by factors other than the trade war. Within emerging markets, China has suffered the biggest trade-related hit.
In terms of currencies, the US dollar, unlike US stocks, has seen no 'trade penalty'. In fact, it has benefitted modestly from the trade war. The Chinese yuan has been a big casualty; the euro has suffered too, though less so, while the Swiss franc and Japanese yen have lived up to their traditional 'safe haven' status.
Why aren't markets more worried? Differing signals from rates and volatility
So why aren't markets more worried? For one thing, when trade war and peace fluctuate at the whim of social media posts, it is hard for markets to significantly alter core positions. Instead, they go into wait-and-see mode. Also, in recent years hedging – especially to cover for political risk – has not worked very well. And a third reason the market has kept its nerve is the multitude of dovish moves from central banks in the last six months. The belief that policy help is on hand if necessary is also a factor in why investors have not made any sudden moves.