Trade dispute chills investor spirits

Thought of the day

by Chief Investment Office 19 Jun 2018

Equities around the world moved sharply lower as investors reacted to the latest salvos in the US-China trade conflict. The Shanghai Composite Index slumped as much as 4.98% intra-session after President Donald Trump threatened tariffs on an additional USD 200bn of Chinese imports. The Chinese threat to retaliate "forcefully" added to the anxiety, with the Euro Stoxx 50 declining 1.5% while S&P 500 futures pointed to the largest one-day fall since April.

We still believe it is in the interest of all participants to contain the economic and market damage. The first-round economic effects of the tariff increases so far are likely to be modest. Many of the goods being taxed, from air-conditioners to ball bearings, can be substituted for, redistributing global trade rather than curbing it. Global growth remains strong, especially in the US, with GDP forecast to expand by 4% annualized in the second quarter. That reduces vulnerability to trade skirmishes.

But trade talks have taken a turn for the worse and a further escalation could inflict lasting damage on investor sentiment. In particular we will be monitoring several key risks.

  1. First, the dispute seems to be intensifying. China responded within hours to the US tariff announcement on Friday and today vowed to match any measures. Taken together with the earlier levies, the latest White House statement threatened as much as USD 450bn in tariffs on China, with the current brinkmanship suggesting that neither side is willing to back down.
  2. Second, a continuation of the conflict threatens business confidence. Atlanta Federal Reserve President Raphael Bostic said on Monday that trade tensions could overshadow the positive business sentiment generated by last year's US tax cuts. "That optimism has almost completely faded among my contacts, replaced by concerns about trade policy and tariffs," he said.

While we remain overweight global equities, the threat from trade tensions has been mounting and needs to be carefully monitored.

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