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

01 /

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

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

Disclaimer

The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research 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 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. To the extent that any content is construed as investment research, you must note and accept that the 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 under relevant laws.

Trading in financial instruments carries risk, and may not be suitable for you. Past performance is not indicative of future performance. Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo 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 Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning 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. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

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

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 are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.