- Global markets are on edge, pending further escalations in the US-China trade war.
- Data from UBS shows that among global stock indexes, China’s CSI300 has been hardest hit since the US first announced trade sanctions in March.
- Looking ahead, UBS expects the Trump administration to announce a 10% tariff on another $US200 billion of Chinese goods.
Global markets have been in a holding pattern this week, in anticipation of the Trump administration’s next trade announcement.
At stake is whether President Trump follows through with an order to impose tariffs on another $US200 billion worth of Chinese goods.
And with US-China trade tensions now entering their six month without a resolution, the global macro team at UBS have crunched the numbers to show how different markets have been affected.
Here’s the summary:
Looking ahead, the UBS base case is for the Trump administration to announce a further 10% tariff on $US200 billion of Chinese goods. But the bank isn’t ruling out tariffs of up to 25% on that amount.
In turn, higher tariffs would weigh on the US economy, and UBS is currently forecasting the Federal Reserve won’t hike rates again in December.
That view stands in contrast to market pricing, with CME’s Fedwatch tool currently assigning a 75% probability of a December rate hike.
So far, Trump’s trade tactics have given rise to a clear diversion between US and Chinese stocks. The S&P500 has been relatively immune, but China’s CSI300 index has been hit the hardest.
But UBS said such a scenario makes US stocks more “vulnerable” should trade tensions continue to escalate.
“Conversely, if trade tensions ease, EM Asia equities have the most room to rally,” they said.
The UBS team conceded that stock price moves in different markets aren’t guided solely by trade tensions. Other factors such as Brexit, emerging market currency risks and concerns around Italy’s government debt have also played a role.
But they said the simulation methods used were robust enough to ensure the conclusions were “statistically significant”.
First, they compiled an index of 115 global stocks deemed to have high exposure to global trade.
Then they split out days on which the stock price moves diverged from the MSCI All-Country World Index by at least 0.5% (there’s been 24 such days since March).
“Comparing the actual and ‘shadow’ (free of trade shocks) price indices enables us to estimate the impact of trade tensions on global equities,” UBS said.
Notably, the one index still in positive territory is the ASX200, despite the Australian economy’s strong links to China.
But as UBS highlighted, stock moves can’t solely be viewed within the prism of trade tensions. For example Aussie stocks have also benefited from a weaker AUD, since the US dollar commenced its recent uptrend in July.
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