Risk Assets Rocked as US China Trade War Intensifies

Yesterday, we noted that FIFA trumped Forex in terms of excitement, but today’s been all about the markets. As my colleague Ken Odeluga noted in his prescient post yesterday morning, trade issues are front and center for investors in this week’s trade.

Last night, US President Trump ordered his chief Trade Representative to draft a list of $200B in Chinese tariffs to receive 10% tariffs. This represents a dramatic escalation after last week’s tit-for-tat introduction of import duties on up to $50B in goods by both the US and China.

While those tariffs were targeted primarily at “upstream” goods and raw materials in an attempt to limit the ultimate impact on consumers, fully quintupling the value of the goods impacted would inevitably hit consumers’ pocketbooks, effectively “canceling out” a portion of the fiscal stimulus from last year’s US tax cuts.

Market Reaction

So-called “risk assets” have predictably taken a big hit on the latest trade headlines, with Asian stocks falling by 2-4% across the board, the Dow Jones Industrial Average trading off by 350 points as of writing, and oil dropping by 2%. The carnage was worst in China, where 25% of shares traded limit down (-10%) on the day.

Traders have instead been piling into “safe haven” assets, driving the yield on the benchmark 10-year Treasury bond down by 4bps and prompting the yen to rise by more than 1% against most of its major rivals, with the US dollar and Swiss franc also catching a bid:

Source: FinViz

Looking ahead, the market’s reaction will depend on China’s response to the bellicose US threat. For what it’s worth, China has already vowed to “forcefully retaliate” against the US, signaling that trade tensions may get worse before they get better. While the most straightforward move would be for China to threaten to escalate its own tariffs on US goods, there are other ways for The Red Dragon to respond. For instance, China could pressure the Trump administration by decreasing cooperation on North Korea or Iran, or perhaps by taking more provocative actions in South China Sea. One way or another, geopolitical risk is on the rise, and that will serve as a headwind for risk assets unless we see signs that the US/China tensions are thawing.

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