Equity markets remain sensitive to each twist in the US-China trade dispute. The S&P 500 fell as much as 1.6% on 4 April after China unveiled 25% tariffs on around USD 50bn of US imports – a response proportionate to the latest US tariff proposals – yet closed 1.2% higher after officials from both countries noted the potential for a negotiated solution.
As a result the S&P 500 recorded its 26th move of 1% or more this year, three times the total for 2017. But while news headlines are generating short-term market noise, looking ahead we see reasons for a more sanguine approach.
- Both the US and Chinese tariffs don’t come into force immediately, leaving time for a negotiated settlement. Previously announced tariffs on metals imposed by the US were subsequently watered down.
- Even if a deal is not reached, the proposed tariffs are not big enough to significantly disrupt trade volumes. A trade war implies falling trade volumes. President Donald Trump's domestic economic policies should increase the US current account deficit, and so increase trade volumes.
- Current implied equity volatility is unexceptional. Year-to-date the VIX index has averaged 17.6, below its average since inception of 19.4. But recent volatility feels more pronounced because of the period of abnormal calm that preceded it – the VIX averaged just 11.1 last year.
While we continue to monitor the risks of escalation, our base case is that policymakers can avoid a major disruption to global trade. And in our view the recent return to more normal levels of volatility, caused in part by trade frictions, does not preclude further gains for global equities.