Here’s why markets have been calm since Trump’s trade escalation – and why it probably won’t last

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  • There are two main reasons for the sanguine response from global markets to Trump’s latest tariff announcement, Capital Economics says.
  • CE’s Oliver Jones says the bad news was already priced in, and the tariffs weren’t as high as markets feared.
  • But Jones expects tensions to escalate into 2019, when markets will also have to navigate a US-led slowdown in global growth.

  • The Trump administration’s announcement on Tuesday morning marked a significant escalation in the US-China trade war.

    China responded with more tariffs of its own, but global markets so far appear to be unconcerned — a reaction which is somewhat noteworthy in itself.

    Stocks in China’s responded with a gain of almost 2% on Tuesday, and followed that up with more strong gains yesterday:

    Capital Economics

    Oliver Jones from Capital Economics says there are two main reasons for the sanguine response.

    Firstly, a lot of the bad news on trade was already priced in. And while Trump’s announcement confirmed the US’ intentions, it wasn’t altogether unexpected.

    “Chinese equities had already fallen a long way in anticipation,” Jones said.

    Prior to this week’s gains, China’s benchmark Shanghai Composite index had slumped by more than 25% from its January highs.

    “Second, the tariffs were set at a lower rate than had previously been suggested,” Jones said.

    “The US duties are at 10%, and China’s at either 5% or 10%, whereas both sides had previously threatened 25%.”

    But ultimately, Jones said this trade war still has further to run. And it’s more likely than not to get ugly from here.

    The most obvious risk is that US tariffs are set to rise to 25% on January 1, 2019 if an agreement can’t be reached.

    Before that, there are US mid-term elections in November. But Jones doesn’t expect a shift in strategy from the US, even if the Democrats win seats from the Republicans.

    And aside from trade, he says investors should be braced for a broader US-led downturn in global markets, as the US economy slows next year in response to rate hikes from the Federal Reserve.

    Jones added that based on the recent moves in currencies, markets appear to have been too focused on China when it comes to US trade policy.

    “That may ultimately prove to be naive,” he said.

    “Indeed, Trump asserted only yesterday that the US is being ‘ripped off’ by the EU as well as by China.”

    So the odds are that trade tensions with China are still going to ramp up. Plus, Trump isn’t done picking fights with other major trading partners.

    As a result, this week’s gains for trade-exposed stock markets are unlikely to last.

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