Displaying items by tag: trade war

(Beijing)

If we think the trade war is being rough on our markets, just take a look at China. The country’s benchmark Shanghai Index is down 22% since its peak in January, and the yuan is dropping as well. In addition to Trump’s rhetoric and the threat of a trade war, China is also seeing weakening domestic economic data.

FINSUM: China is a lot more exposed to the trade war than the US. It has less broad and deep financial markets, so there are not as many places for investors to hide, and its economy is much more export-reliant, making it more vulnerable to tariffs.

(New York)

Investors need to take notice, a bear market is arriving. Trade wars and rising rates have been plaguing equity markets, and US indices seem to have already seen their peaks. But while the US market is still holding on, investors need to take notice that both China and emerging markets are both flirting with bear markets, with China crossing into one this week. The threat of a trade war and a strengthening Dollar are both weighing on international stocks, and are threatening to crimp economic output. Morgan Stanley is warning of a big drop in the MSCI emerging markets index. According to the Bank’s strategy team, “This is a dangerous market … We now think we’re heading to an outright bear market”.

FINSUM: If there is a global recession coming, it seems like one that will start overseas and filter back to the US. The big question is whether that recession will lead to major asset meltdowns, such as in corporate debt.

(New York)

On paper, the odds of a recession have never looked very high. It is only human instinct that makes many believe that is where we may be headed. However, that is starting to change. Since the Financial Crisis, the odds of a recession in the next 12 months held very low, around 5%. However, they have just jumped to 16% according to a popular recession calculator from BBVA. The last time the figure was higher was during the last recession. The two big factors boosting the odds are the US’ flattening yield curve as well as the threat of a trade war, which is hard for anyone to gauge. According to an economist at BAML, “Our calculations suggest that a major trade war would lead to a significant reduction in growth … A decline in confidence and supply chain disruptions could amplify the trade shock, leading to an outright recession”.

FINSUM: The models seem to be starting to catch up to what many innately know—that the economy and markets have been running hot and storm clouds are on the horizon.

(Washington)

In what seems to be a perfect study in the law of untended consequences, the government’s new focus on tariffs are driving US manufacturers out of the country. American motorcycle maker Harley-Davidson (side note: can you think of a company more American than Harley-Davidson) has announced it will move some production off-shore because of retaliatory EU tariffs on American motorcycles. Europe is one of the biggest consumers of US products, including for Harley, and the company does not want to lose market share by raising prices for European consumers.

FINSUM: This is the downside of a trade war. Trump wants to have more US manufacturing jobs at home, but retaliations can cause perverse economic incentives to move manufacturing overseas.

(New York)

The Dow had a very ugly day yesterday, as did the Nasdaq and S&P 500. However, that might just be the beginning, argues Barron’s. Markets plunged as Trump escalated the trade stand-off with China and other US trading partners, including limiting Chinese investment in American technology companies. And while markets have been looking at a possible trade war for months, it seems as though they have not fully priced in one of the magnitude which now looks to be emerging. According to one analyst, “Markets are starting to price in the possibility of a trade war with China, however, I would argue that a true trade war–one that drives us into a worldwide recession–would lead to a 20% or more drop in prices, so we haven’t priced one in yet”.

FINSUM: This is a very ugly, but realistic, prediction. We are increasingly worried about the direction of the international dispute on trade.