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What Will Be the Effects of the US-China Trade War Escalation?

40 mins.
14 MAY, 2019
trade wars
Ignacio de la Torre null
Leopoldo Torralba null
Joaquín Rivera null
Macro Global US China AER Global AER Personal
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The stock market reaction to the trade war escalation has turned this month of May into the worst performing since 1970 and has investors singing the market motto “sell in May and go away”. The recent market movements have been intense, with the most acute drops occurring in Asia and the US, especially in companies with a high degree of economic activity in China, whose supply chains are facing huge uncertainty. Volatility, an indicator that can serve as a gauge for the market’s risk appetite, was up to over 20% with a simultaneously inverted yield curve (in theory it should have an ascending slope to reflect greater risk at a longer timeframe). In currency markets, the Renminbi down almost 1% in spite of government intervention (the consequence will be a sacrificing of Chinese reserves), which is provoking weakness in other emerging market currencies such as the Turkish Lira or the Argentinian Peso. Investors are flocking to the Yen as a refuge currency. At the same time, fixed-income markets in the US begin to discount the possibility that the trade war affects the economy to the point that the Fed will be forced to lower rates by the end of the year (current probability of this scenario is around 75% according to futures). Lastly, tension in the commodities’ market is evident. Oil prices are down almost 5% this month with copper down 8% from April’s high, discounting the problems that these tensions could cause for China, consumer of half the world’s copper supply. This report is a Q&A analysis of the reasons we find ourselves in this tumultuous situation, remounting back to the 1990s. Additionally, we explain the current progression of the trade war, the economic exposure of each agent, the risk of possible contagion to other economies (a possible trade war between the USA and Europe is still on the table in the mid-term, with the automobile and agricultural sectors being the point of contention), and the national security implications that will persist regardless of the outcome of the trade talks.

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