Skip to main content

After months of simmering tension between the world’s two largest economies, the U.S. will impose tariffs on $34 billion worth of Chinese goods at just after midnight on Friday. The key question for financial markets: will it trigger fresh volatility, or is the trade war escalation already priced in?

The rally of as much as 4.5 per cent in European carmakers on Thursday, fueled by discussions on lowering tariffs with the U.S., suggests markets had already been primed for adverse news on global trade. Yet Chinese shares remained under pressure as officials wouldn’t say whether talks that could deliver a last-minute reprieve were ongoing.

“We can no longer talk about whether a trade war will develop, only the scale of the conflict,” Steve Barrow and Jeremy Stevens at Standard Bank wrote in a note this week. “A promising global economic and financial market picture has been thrown into turmoil.”

Story continues below advertisement

This new era of protectionism could hardly have come at a more sensitive time for markets. While the backdrop for growth is indeed strong -- particularly in the U.S. -- financial assets were already girding for so-called quantitative tightening as the world’s major central banks step back from stimulus.

That’s siphoning liquidity from the system, and volatility is on the way back as a result. The Cboe’s Volatility Index, known as the VIX, has averaged 16.3 this year, compared with 11.1 in 2017. After recovering from a spike in February’s market blow-up, currency swings have risen for six of the past seven weeks, according to JPMorgan Chase & Co. indexes.

“Investors should expect volatility to continue,” says Mark Haefele, chief investment officer at UBS Global Wealth Management. “We recommend investors stay invested, but consider five actions: looking to alternatives, hedging equity exposure, improving credit quality, diversifying sector and country risks, and taking a longer-term view.”

The worst-case scenario is that the trade war, in concert with monetary tightening, upends the global business cycle. German Chancellor Angela Merkel raised the specter of the financial crisis as she warned of potential fallout on Wednesday. Shares of European carmakers had fallen more than 11 per cent since mid-June through yesterday.

Still, the sector’s rebound today suggests that a lot of negative news on tariffs is already priced in, Michael Bell, a global market strategist at JPMorgan Asset Management, said in an interview. If trade concerns die down, stock markets may see a “pretty big bounce,” he said.

Ticking Clock

U.S. stocks are already outperforming amid a global slide, the dollar hit the highest in almost a year last week and Treasuries are well supported even as rates rise.

Story continues below advertisement

Contrast that with Chinese assets -- Shanghai’s benchmark share gauge tumbled into a bear market last week and have extended the drop since, while the country’s central bank has verbally intervened to slow the yuan’s descent. Only Chinese bonds are on the up, catching a bid as domestic investors flee riskier assets.

“So far the trade war dynamic has made significant headlines,” said James McAlevey, head of rates at Aviva Investors. “Fifty billion dollars writes headlines but it doesn’t move the needle on U.S. growth. If it doesn’t escalate, we don’t think it has material knock-on implications for the U.S. economy.”

All the same, a U.S. factory survey on Monday showed executives “overwhelmingly concerned” about tariffs, and some companies are already sounding warnings. While investors are turning to American assets, they are opting for defensive strategies -- pouring cash into exchange-traded funds that track producers of consumer staples and energy, for example.

Meanwhile, both countries seem in no mood to back down -- the U.S. this week moved to block China Mobile Ltd. from entering the American market, and a Chinese court temporarily banned Micron Technology Inc. chip sales. Washington will impose the new tariffs from one minute past midnight Eastern Time on July 6.

“The clock is ticking until Friday’s trade war threats become a reality,” Jasper Lawler, head of research at London Capital Group said in a note. “Relations between the U.S. and China remain hostile, rattling investors. Further blocks and red tape this time on the likes of Micron Technology and China Mobile highlighted the likelihood of increased friction.”

Report an error
Tickers mentioned in this story
Unchecking box will stop auto data updates
Comments

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • All comments will be reviewed by one or more moderators before being posted to the site. This should only take a few moments.
  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed. Commenters who repeatedly violate community guidelines may be suspended, causing them to temporarily lose their ability to engage with comments.

Read our community guidelines here

Discussion loading ...

Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.
Cannabis pro newsletter