The Trump administration’s imposition of tariffs on US imports of steel and aluminium could be the opening salvo in a full-blown trade war, which could be either multilateral or bilateral.
That was one of the conclusions of a trading note written by analysts at BNP Paribas published today.
The analysts said that, in the event of a multi-lateral trade war, broad equity indices would likely fall by around 15%-20%, with multinationals and technology companies hit the hardest.
Currencies such as the Japanese yen and Swiss franc would benefit from the initial shock, while emerging market currencies would depreciate.
Under the bi-lateral scenario it would expect global equity markets to fall by between 30%-50%, with equity indices dominated by technology, multinationals and commodity producers suffering disproportionately, with the yen and Swiss franc being initial beneficiaries from a risk-off move.
BNP Paribas warned that in the event of a severe trade war it would not view as sacrosanct or secure the US dollar’s status in general, and US government debt’s status in particular, as the world’s foreign exchange reserve of choice and pre-eminent safe asset.
The firm said it could see the Japanese yen as a beneficiary in a risk-off environment, as it scans as cheap in real-effective terms, is liquid and investors do not seem to have stretched long positions on it.
Seema Shah global investment strategist at Principal Global Investors cautioned that in the event of stronger-than-expected inflation data another spike in bond yields would leave the equity market heavily dependent on strong global growth to carry it through.
If the threat of a trade war is still present, markets would struggle to stabilise, she said.
“Donald Trump has repeatedly cited the rising stock market as proof that his presidency has been successful,” she said.
“A trade war is not in the US administration’s interests, and recent negative market reaction to trade tariffs should moderate their approach.
“Barring a policy error, the more immediate threat from trade tariffs is that markets continue to be disrupted by greater uncertainty and higher volatility. Be mindful of trade risks, but even more watchful of interest rate risk.”
©2018 funds europe
