China vs. US: Trade war or war of words?

What the sabre rattling is all about?

China’s tit-for-tat reprisals clearly caught markets by surprise last week. With Chinese exports to the US being 4 times bigger than US exports to China, China seems to have the most at stake in a quid-pro-quo process. Still, we think the most likely outcome is that both parties will start a prolonged negotiation process, not an outright trade war.  Keep in mind that very little has happened yet in terms of concrete action–it is still a war of words. Although president Xi offered little in terms of genuine news in his widely followed Boao speech on 10 April, China’s more conciliatory tone recently might be an early indication that this war of words will not transform into a trade war.

That said, when it comes to goods, trade uncertainties are unlikely to fade before the US mid-term election. Longer term, however, the core of the matter is not the rust belt, it is the protection of intellectual property. This particular issue is more structural in nature as it relates to China’s ambition to become a world leader in tech, e.g. artificial intelligence. Tech stocks have been leading equities higher in the current bull markets, and many believe that whoever wins the technology race will also win global economic leadership. Therefore, the transfer of intellectual property from the US to China is taking centre stage. Ultimately, it is about who will be the world’s leading economy in 10 years’ time.

How does this affect the bigger macro picture?

The hay days of fast-growing trade are over and a more hawkish tone on trade policy in general is here to stay, we believe. The most important take-away is that yesterday’s globalisation winners will not be in the driving seat in the future. It is important to note that global trade intensity (trade/gdp) already peaked a few years ago. Protectionist measures were on the rise way before the recent trade tensions escalated. On top of this, technological progress (robotics) is making insourcing of production more favourable. So a less trade-friendly environment is not new in itself. But for many years, trade has contributed to strong global growth; in the same way “peak trade” is now contributing to the low growth environment we are in.

Figure 1: Global growth becoming less trade-intense


The market impact: Signal or noise?

From a market perspective, we think the worst case of an outright trade war will be avoided–but this doesn’t mean business as usual; the average level of protection is likely to rise on a more structural basis. We have moved passed peak trade.

The uncertainty stemming from the war of words on trade policy is not the root course of disappointing YTD performance for risk assets, but it is adding to the woes. The core reason for the general risk-off mode, as we see it, is the tightening of monetary conditions in combination with a market priced to perfection. The world’s most important central bank is hiking gradually and money market financing is becoming more expensive as US dollar liquidity is becoming scarce. This is the real issue that should keep investors awake at night. Keep in mind that the recent widening of Libor-OIS spreads amounts to an additional 1-2 hikes from the Fed.  Monetary headwinds are gathering pace, and the market is beginning to take notice. That said, if we see an outright trade war in terms of concrete action taken, it could be the straw that ultimately breaks the camel’s back for (already wounded) equity bulls.

About Nordea Asset Management
Nordea Asset Management (NAM, AuM 223.6 bn EUR*), is part of the Nordea Group, the largest financial services group in Northern Europe (AuM 330.4 bn EUR*). NAM offers European and global investors’ exposure to a broad set of investment funds. We serve a wide range of clients and distributors which include banks, asset managers, independent financial advisors and insurance companies.

Nordea Asset Management has a presence in Cologne, Copenhagen, Frankfurt, Helsinki, London, Luxembourg, Madrid, Milan, New York, Oslo, Paris, Sao Paulo, Singapore, Stockholm, Vienna and Zurich. Nordea’s local presence goes hand in hand with the objective of being accessible and offering the best service to clients.

Nordea’s success is based on a sustainable and unique multi-boutique approach that combines the expertise of specialised internal boutiques with exclusive external competences allowing us to deliver alpha in a stable way for the benefit of our clients. NAM solutions cover all asset classes from fixed income and equity to multi asset solutions, and manage local and European as well as US, global and emerging market products.

*Source: Nordea Investment Funds, S.A., 25.01.2018

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