Tariff wrecking ball to hit global growth Tariff wrecking ball to hit global growth Tariff wrecking ball to hit global growth

Tariff wrecking ball to hit global growth

Macro 6 minutes to read

Summary:  Risk sentiment has turned sharply since the days of the post-January 4 market rally, but there is a real risk of further correction as US president Donald Trump continues to escalate his rhetoric on the US-China trade war.

Market sentiment is fragile and risk appetite is weak as trade war risks and potential knock-on effects to the global economy roil investors' outlook. At the centre of the market’s concern is the obliteration of green shoots in global growth arising from escalating trade tensions causing a recalibration in growth expectations for the second half of this year.

The bond market sniffed this growth slowdown out some time ago; equities are catching on and once the Federal Reserve wakes up to the market's cries for help, rates will be cut in order to bolster economic growth and attempt to prolong the US economic expansion. 

Even after US stocks recorded their worst month of the year, there is room to correct further as a pugnacious President Trump opens new battle lines, threatening tariffs on Mexican goods. The uncertainty paralyses decision making for multinational companies, burdens capex intentions and forces supply chains to be unraveled in order to remove risk. For those hoping these tariffs won’t be implemented, the President’s weekend tweet fest did nothing to alleviate fears. It seems this new front in the trade war is here to stay, and the Trump put hasn’t hit its strike price yet.
Trump tweets
Pivoting back to China, there is little hint of progress on the US/China trade front as the situation continues to worsen. Both sides continue to blame the other for the breakdown in negotiations an impasse that is unlikely to be rectified until Trump and Xi meet in Osaka at the G20 summit. It remains apparent that trade is a mere sideshow to the unfolding fight for technological and economic supremacy, and we should be ready for a long and protracted battle between the US and China.

As if the threats to rare earths are not enough to illustrate the growing US/China rift, the Chinese Ministry of Commerce announced that it would be establishing its own list of “unreliable entities” late Friday. This is a clear retaliation as tensions have risen since the US blacklisted Huawei. The list will target “foreign businesses or individuals that do not abide by market rules or contractual agreements as a result of economic sanctions imposed against China or severely damage the legitimate interests of Chinese industries” said Ministry of Commerce spokesman Gao Feng. Expect companies that cut ties with Huawei, China’s tech champion, to be targeted. 

Shortly after, China’s state-run news agency Xinhua reported that China is opening an investigation into FedEx. According to Xinhua, FedEx failed to deliver express packages to designated addresses in China, “seriously damaging the lawful rights and interests of its clients and violating laws and regulations governing the express industry in China.” This probe comes as Huawei raises concerns that packages destined for addresses in China were diverted to US without authorisation, another retaliation for the US' moves against Huawei.

Over the weekend China released a white paper on trade blaming the US for the breakdown in negotiations, stoking nationalist sentiment and outlining a firm stance on protecting Chinese sovereignty. The white paper states that at the most recent talks in May, the US used “intimidation and coercion” and “persisted with exorbitant demands, maintained the additional tariffs imposed since the friction began, and insisted on including mandatory requirements concerning China’s sovereign affairs.” The paper goes as far as to troll Trump’s 2016 campaign slogan saying the escalating trade war hasn’t “made America great again”.

The paper also lays down Beijing’s prerequisites for reaching a trade deal, including the US removing additional tariffs, realistic purchases of US goods and a balanced agreement. This is a far cry from President Trump’s current stance –“TARIFF is a beautiful word” – so on that basis alone a deal on trade seems a long way off. 

As escalating trade tensions across the globe cause growth expectations to be altered lower, risk-off sentiment will remain and volatility will likely increase from here. The implications of a permanent shift in the US/Chinese relationship are hard to fathom as globalisation has profoundly entwined supply chains, but investors should not dismiss the notion of a splintering US/China relationship and the effect this could have on risk premiums. And now we have potential tariffs on Mexican goods to contend with also, another nail in the coffin of higher risk premiums.

Despite all this, the Fed continues to preach patience given a strong US economy. Even perma-dove Kashkari is “not quite there yet” on rate cuts. But bond markets are screaming the opposite, and equities are finally waking from their complacent climb to date propelled by dovish coos from central banks.

But as trade tensions continue to escalate, financial conditions tighten, business confidence is dampened and supply chains are forced to unravel, a dovish chant will no longer be enough to support growth. The bond market sniffed this growth slowdown out sometime ago, equities are catching on and once the Fed wakes up, rates will likely be cut.
Fed rate cuts
The yield curve
Our view remains that until we see a more robust macro environment and confirmation of a self-sustaining re-acceleration in economic growth, it’s time to move into capital preservation mode. Global markets remain vulnerable as they are yet to fully price in the unfolding fight for technological supremacy between the US and China, let alone a new dimension of uncertainty as Trump wields his tariff stick on Mexico under the guise of national emergency.

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000

Contact Saxo

Select region


The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.