US president Donald Trump rattled markets on Monday with his latest threat to ratchet up tariffs on China. Is this the beginning of a renewed, broader bout of financial turbulence, or a mere blip in the roaring 2019 bull run?
After the bounceback of early 2019, Mr Trump’s vow to raise tariffs on all Chinese imports by 25 per cent and slap similar duties on $325bn of Chinese goods that are currently “untaxed” was an unwelcome jolt for many investors.
“This is an event risk that is very concentrated and relevant,” said Alessio de Longis, a portfolio manager at OppenheimerFunds. “The entire market rally year-to-date has been driven by two things: more dovish central bank policy and the belief that trade tensions were easing. Now, we’re removing one of those things.”
Since the beginning of the year, the S&P 500 has gained more than 10 per cent, Chinese equities 22 per cent, European stocks 14 per cent and emerging markets almost 11 per cent. All told, it is the fourth best start to a year since 1970 for the MSCI World index, and the fourth-best since 1929 for US equities, according to Goldman Sachs. This made investors nervous that a reversal was overdue.
“Markets were at all-time highs, so there was a certain level of complacency about [trade],” said Tobias Levkovich, chief US equity strategist at Citigroup. “There’s a sense that markets were vulnerable to something.”
That vulnerability was on display early on Monday, with the MSCI World equities index down more than 2 per cent at one point. But markets recovered some of those early losses to end the day down a more modest 0.6 per cent, reflecting hopes that the latest shock from Mr Trump will end up being mere posturing ahead of an ultimate US-China deal.
The S&P 500 futures index fell back again on Monday evening after senior US officials accused their Chinese counterparts of backtracking on some of their promises, but many investors are hopeful that an agreement will be struck.
“There is a willingness on both sides to reach a resolution, and an understanding that [2018’s tit-for-tat sanctions] weren’t useful for both sides,” said Anik Sen, global head of equities at PineBridge Investments.
Mr Trump’s turn in rhetoric comes just days before US officials are set to meet dozens of Chinese delegates in Washington for so-called “make-or-break” negotiations to iron out the final contours of a trade agreement. The talks are still scheduled to take place, but Beijing officials are said to be “livid” by the fresh threats.
Sonal Desai, chief investment officer for fixed income at Franklin Templeton, said the escalation is clearly part of the Trump administration’s negotiating strategy. For this reason, she expects the trade tensions to increase volatility, but only intermittently.
“Since the noise about trade started with this administration coming in, the time that the market spends focused on trade headlines remains reduced,” she pointed out. “There will be periods of heightened tension, but then it will die down.”
The outcome of the US-China trade talks has huge implications not only for financial markets, but for the global economy more broadly.
Growth is just starting to return to Europe, with the eurozone growing 0.4 per cent in the first quarter, according to preliminary estimates. And in China, there are signs the government’s latest round of stimulus measures is having some effect. The economy expanded at an annualised rate of 6.4 per cent between January and March, driven in part by a pick-up in industrial production.
Investors hope that if Washington and Beijing reach an accord it could help get the global economy back on track. Should the deal unravel, the tepid recent resurgence is under threat — as is the 2019 global equity market recovery.
“If we can get through this trade situation we could see a return to global synchronised growth and still-low inflation, which would be very positive for equities,” said Mr Sen.
However, the danger is that the muted US market reaction to Mr Trump’s latest sabre-rattling could embolden the administration to follow through on its threats and keep escalating the conflict. The US is also negotiating with Europe over a transatlantic trade deal, but the outlook is equally murky.
That means trade uncertainty could continue to dog markets for longer than investors currently anticipate, even in the event of a resolution of the stand-off between the world’s two biggest economies.
Michael Zezas, head of US public policy strategy at Morgan Stanley, frets that trade-related market jitters are here to stay long after US and Chinese officials strike a deal.
“If and when a trade deal comes, there is a tremendous amount of uncertainty and tension that will endure for the long term between the US and China, which could impact business conditions, add in new supply chain costs and create other non-tariff barriers,” he said.