Market Comment - Trump trade tweets upset markets

News item -

What was expected to be the final round of negotiations for the US/China trade dispute has been up-ended by tweets from US President Donald Trump. It is now uncertain whether the Chinese delegation will make the trip this week for the next leg of the US/China trade negotiations.

The last few months have been characterized by strong equity returns with low volatility. This has been fuelled by a nearly perfect environment for risky assets. Central banks are dovish, the world economy is expected to stabilise before reaccelerating in the second half of the year and signs had pointed to a resolution of the trade conflict between the US and China. The latest tweets from Trump, however, could upset this scenario.

The tweets raise two questions: Are the trade negotiations collapsing? and What is now the risk of a trade war between the US and Europe?

Unlikely that US/China negotiations will collapse

The risk of the negotiations collapsing between the US and China seems unlikely, as both parties would prefer to avoid any risks that would be detrimental for their economies. History, however, tells us that it takes time to make commercial deals. There was already a deadline in February that was missed. It could be that the latest Trump tweets are part of a negotiation strategy. The US leader, recently boosted by strong US growth data, could be adding last-minute pressure in order to eke out an additional advantage in the talks. Overall, we do not believe that the US/China trade negotiations will now completely collapse, although downside risks have risen.

Is Europe next?

The risk that Trump will next ramp up a trade dispute with Europe is difficult to ascertain, as the US president is hard to predict. Trump has also shown that he has no problem maintaining pressure on US commercial counterparts. We therefore believe that it is possible that the risks of a further trade dispute between the US and Europe could be increasing.

What does it mean for equity markets?

As equity markets have recovered quite significantly since the low of December, valuations do not offer a significant buffer for tail risks, meaning that any bad news has the potential to have a significant market impact. As a consequence, it seems likely that markets will be volatile over the coming days, as long as visibility remains low regarding the consequences of Trump’s tweets and their effect on negotiations.

Any cancellation of the visit by the Chinese officials to the US this week or materialisation of Trump’s threatened increase in tariffs would certainly feed short-term risk aversion. What should investors do?

We maintain our recommendation to take a neutral stance toward stocks. We do not recommend making any changes to your investment portfolio based on the latest hurdle in the US/China trade negotiations. Our neutral positioning should help us to overcome this period of volatility. We will continue to monitor the situation and its impact on markets and the portfolios of our clients.

Olivier Raingeard, Global Head Equities

For more information on this topic, read, “What would be the impact of additional US-China tariffs?,” published today by ABN AMRO Group Economics.

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