Markets tumbled yesterday after president Trump announced further trade tariffs, this time aimed exclusively at China. The extent of the fall indicates that despite some protectionist measures already being priced in to the market, the recent ousting of moderate senior figures in the White House is translating into a more belligerent administration, hence causing market expectations to be lowered.
However, despite the risk of trade tensions escalating, we still believe that Trump is mostly pursuing a political win to offer to his voters, not a full-blown trade war. If the latter risk does not materialize, macroeconomic indicators continue pointing towards an extension of a period of synchronized global growth, which supports investing in risk assets. Therefore, we currently do not see any need to reduce risk in our portfolios, especially given that the current positioning is already quite conservative. Obviously, we will remain vigilant and ready to take action should we see more evidence of an impact to growth prospects for the economy.
As for the USD dollar and interest rates, the impact of a trade war is quite uncertain. Whilst a reduction in the trade balance in the US would decrease the amount of the dollars in circulation (causing the latter to appreciate), it would also generate inflation. Inflation would have the opposite effect and cause the dollar to depreciate (unless this is accompanied by a rise in rates by the Fed). Finally, it remains to be seen what will be the reaction of the big US Treasury holders (China and Japan) as they may opt to retaliate by lowering their US treasury purchases. This would cause yields to rise and with it, the attractiveness of the dollar.
Dr. Fernando de Frutos
Chief Investment Officer, Boreal Capital Management AG
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