Traders Move Risk Off The Table Alarmed By Escalating Trade War

Risk aversion dominated on Tuesday as investors express their alarm at the escalating trade tariff spat between US and China. Asian market tumbled overnight with the Shanghai composite closing down over 4%, European bourses have spent another day in the red and US markets are extending losses as they approach areas of potential support.

Trump initiated the second round of this trade row by looking into 10% tariffs to be placed on $200 billion worth of Chinese imports. This would come in addition to the tariffs on $50 billion worth of imports, should China retaliate; a move which effectively confirms that a damaging trade war is underway, leaving many questioning where the endpoint will be? Global GDP could stand to be hit by 2% - 3% should the trade war continue and spread, to put this into context the Great Recession wiped out 6% of the global GDP, so this trade spat is by no means insignificant.

For weeks the market has been relatively complacent that Trump’s tough protectionist rhetoric was merely a negotiating tool; however, the realization that the US President is willing to go ahead with his threats has sent a shiver through the markets. Risk is being taken off the table with equities taking a hit. The Dax is off a further 1.5% today extending 1.3% loss from the previous session, with large exporters dominating the lower reaches. Meanwhile, safe haven currencies such as the yen and the Swiss Franc are benefiting from increased inflows.

FTSE finds support from weaker pound

The FTSE is once again faring a little better than its European and US counterparts, managing to claw back earlier losses to trade just 0.5% lower heading towards the close. The weaker pound is once again a factor in supporting the index, as Brexit uncertainties highlighted by the government’s defeat in the House of Lords, continue to chip away at sterling demand. Investors will be looking towards The Bank of England’s committee meeting on Thursday willing for some hawkish comments to lift the pound from its 7-month low. Alternatively, a dovish message from the central bank could send the pound back towards $1.30 a level last seen in November.

The end in sight?

Looking ahead, the only potential stop for Trump could be the reality of mid-term elections. A large percentage of the US population is not going to be happy about paying more for imported goods. This is a long shot and still sufficient time away for damage to the markets to continue, however, it could also prevent this trade war from spiraling out of control.