US trade messaging leaves investors cautious

Thought of the day

by Chief Investment Office 26 Jun 2018

Global equities faced renewed turbulence, after confusing White House messaging on plans to restrict foreign investment in US tech firms. US Treasury Secretary Steve Mnuchin first tweeted the trade statement would target “all countries that are trying to steal our technology,” and not just China, sending the S&P down as much as 2%. White House trade advisor Peter Navarro later suggested China would be the sole focus, helping US stocks regain some ground to close down 1.3%. On Tuesday, the Hang Seng index declined just 0.3%, while Eurozone stocks rose 0.3%, recovering in part from Monday’s 2.1% decline.

But we believe the escalating trade debate justifies a cautious approach from investors.

  1. US protectionist threats are still looming. The White House has not backed away from threats to impose higher tariffs on auto imports from the EU. If the US follows through this would mark a further intensification of the conflict. On Friday, the US is due to announce restrictions on Chinese investment, another potential tripping point for markets especially if followed by swift retaliation. And the threat of a second round of US trade actions against China is still hanging, which could affect up to USD 400bn of imports.
  2. China shows no sign of backing down. According to a Wall Street Journal report, China's President Xi, speaking about trade measures to a group of US and European chief executives, said that "if somebody hits you on the left cheek…in our culture, we punch back."

Our base case remains that such heated rhetoric is part of a negotiating process and that cooler heads will prevail. With the US heading for a second quarter annualized growth rate of close to 4% and global earnings strong, we remain overweight global equities. Still, the volatility caused by the trade dispute highlights the need to hold some countercyclical positions. We have overweight positions in 10-year US Treasuries versus cash, and Japanese yen versus US dollar, both of which stand to gain in periods of risk aversion.

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