Trade War Escalation
|Escalated tensions between the US and China remain the dominant driver in financial markets. Risk aversion overnight was reduced as the US Commerce Department stated it would provide temporary licenses for U.S exports to Huawei. Thus reducing the negative impact of last week announced blacklist order against Huawei. This reprieve comes just hours after Google indicated it would end access to popular sites on the Android operating system. This recent move by the US is a clear signal that tensions have moved beyond a “trade war” and a highly negative development. Markets are still pricing in a positive end-result, judged by relative steadiness in equity markets. Asia shares were broadly sportive today with Shanghai up 1.23%. Yet recent aggressive actions by both the US and China to widen tariffs on each other exports have pushed out the timeline for a trade deal. Which in our view, has increased the likelihood of greater stress and possibility of failure.
The market has been blindsided by the sudden escalation and expansion between the US and China trade dispute. Equity volatility has jumped while the S&P 500 dropped 4% in early May. News flow from Washington and Beijing was a deal was imminent. China reversal on details previously agreed upon was a deep hit. Ratcheting up the tariffs on both side, in theory, adds up to $300 billion.
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