Trade war fears lead equity markets down
The chain of events
- US President Trump announced on Thursday 22 March 2018 tariffs on Chinese imports worth up to USD60bn. The list of products affected will be defined within the next 15 days. They are likely to include mainly technology products. The US President says that these measures are the “first of many”.
- China rapidly reacted to the announcement by saying it will impose tariffs up to 25% on imports from the US. This is in retaliation against the steel and aluminum tariffs recently adopted by the US administration. This means that more measures are potentially coming. China says that it will look for legal actions against the US at the World Trade Organisation. China also calls for dialogue.
- Equity markets reacted badly to this newsflow: the Standard & Poor’s lost 2.5% yesterday, the Topix 3.6%, H-shares 2.4%. Europe is down by nearly 2%. Equity markets also digested the news that the Federal Reserve is turning a little bit more hawkish and the nomination of John Bolton as the new White House National Security Advisor, in replacement of H. R. McMaster. Mr Bolton is seen as a hardliner on Iran and Korea, among others.
Our stance on these events
A substantial increase in trade tensions was seen is imminent with the coming release of the report by US Trade Representative Robert Lighthizer about China violations of intellectual property rights. The possible paths going forward are varied. We retain the view that trade tensions will linger but that they will not escalate to trade wars that will have a significant negative impact on global growth. Were the situation to become tenser than we expect, central banks would then have to adjust their policies to limit the downside risks.
The consequence for investors is that they should expect volatility to remain high over the foreseeable future, which was already likely to be the case due to the expected rise in inflation and in bond yields, as well as the loss of momentum in economic and earnings growth as we head towards 2019. The primary trend nevertheless remains up, meaning that investors should take advantage of volatility to add exposure to equities.
Our core scenario of a volatile equity market uptrend remains in place. We will of course follow closely events to check whether the probability of a more negative outcome than expected increases and could affect our economic and earnings growth forecasts.