|14 May, 2019

Trade war uncertainty clouds sentiment

Lukman Otunuga is a research analyst at FXTM. A keen follower of macroeconomic events, with a strong professional and academic background in finance, Lukman is well versed in the various factors affecting the currency and commodity markets. Lukman holds a BSc (hons) degree in Economics from the University of Essex, UK and an MSc in Finance from London School of Business and Finance, where he studied corporate finance, mergers & acquisitions and the role of international financial institutions.

Website: www.forextime.com

Market's initially positive reaction to heightened U.S. sanctions reversed once China retaliated

"In every crisis there’s an opportunity" is the phrase that springs to mind when analysing the latest developments in the trade negotiations between the United States and China.

While it’s true that U.S. President Donald Trump’s decision to increase tariffs from the level of 10 percent to 25 percent on $200 billion-worth of Chinese goods triggered widespread discomfort and concern in the markets, it’s also a fact that global equities pushed higher during the initial reaction.

However, the upside was short-lived after Beijing wasted no time in retaliating by unveiling tariffs of up to 25 percent on about $60 billion worth of US goods. With the United States releasing a list of about $300 billion worth of Chinese goods that could be hit with a 25 percent tariff after Beijing’s retaliation announcement, trade war fears are shifting into higher gear.

Optimism has faded since China’s retaliation because escalating trade tensions remain a significant threat to global growth and stability. Already, the European economy has slowed down, partly because of the reduction in sales growth in China seen in the last half of 2018, and while China’s economy appeared to have recovered lost ground in the first quarter this year, an increase in tariffs on Chinese exports to the U.S. is likely to take a toll going forward. Concerns over tit-for-tat tariffs between the two largest economies in the world are likely to fuel fears of slowing global growth which may heavily impact global equities and multi-national companies’ revenues.

The consequences of trade disputes are well known but it’s important to put them into perspective. It’s significant that the markets show a robust performance in the face of the new global economic order in which the world’s two largest economies are raising tariffs against each other before reaching an unprecedented trade deal. Should there be a positive end result and a trade deal is reached later this year, it could be argued that China would take its place as a leading developed and mature economy, rather than an emerging economy.

Although the trade negotiation process between the U.S. and China is filled with twists and turns, other regions like Europe may benefit long term from the temporary disturbance in their trade relations. If EU manufacturers and traders adapt quickly, for example, they could step in to take advantage of market opportunities that would currently be more difficult for US-based export companies. Additionally, China has increased monetary support to its gigantic economy and the stimulus appears to be having a positive effect, judging by Q1 results.

This leads us to the conclusion that tariff hikes between the U.S. and China may force many major central banks to maintain a cautious or dovish stance in the face of the possibility that growth may slow down again in both economies. The Federal Reserve has paused interest rate hikes due to external factors like the impact of tariffs on global growth. Lower interest rates usually mean a more attractive borrowing and investment climate, which could support overall growth in the final analysis.

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