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Markets and Trade War Fears

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

This document is for information purposes only and does not constitute, and may not be construed as, a recommendation, offer or solicitation to buy or sell any securities and/or assets mentioned herein. Nor may the information contained herein be considered as definitive, because it is subject to unforeseeable changes and amendments. Past performance does not guarantee future performance, and none of the information is intended to suggest that any of the returns set forth herein will be obtained in the future. The fact that BCM can provide information regarding the status, development, evaluation, etc. in relation to markets or specific assets cannot be construed as a commitment or guarantee of performance; and BCM does not assume any liability for the performance of these assets or markets. Data on investment stocks, their yields and other characteristics are based on or derived from information from reliable sources, which are generally available to the general public, and do not represent a commitment, warranty or liability of BCM.

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