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Trade War – What Impact Can Different Scenarios Have on Global Financial Markets?

2 July 2018PoliticsEconomics
Trade News, Stock Market Predictions, Global Economic Outlook - Market Insights by Citibank UK

The recent increase in equity market volatility has coincided with a renewed escalation in trade tensions between the US and its key trading partners. Global financial markets have reacted negatively to escalating US tariffs and the corresponding threats of retaliation from its trading partners.

However, given that the US is reportedly close to accepting offers on trade from China, Canada and Mexico made during the past month, Citi Analysts believe a change of course remains possible. What impact can different scenarios have on global financial markets?

If disputes are settled or sidelined

A settlement of trade issues would likely cause trade-exposed equities across the world to rebound sharply, given the severity of the impact already seen from trade war fears. Citi Analysts expect rebounds to be focused on those that have declined the most so far.

Trump's Trade and Tariff War - Market Insights by Citibank UK

If trade disputes escalate over a prolonged period

Given the late stage of the US recovery, a failure to settle the trade war soon could leave the US expansion vulnerable – which would be particularly concerning when the rest of the world is still recovering from data softness in the first half of 2018. Ironically, the US could be the biggest loser from a trade war – given how globalized the US value chain has become.

While Citi Analysts maintain its base case that a full-blown trade war is unlikely, there could still be negative implications for asset markets should trade tensions escalate. Equities could likely underperform, with Latam, CEMEEA, Europe and Japan the most sensitive. Domestic-focused US firms are also likely to suffer.

Developed market fixed income could do well, with the US outperforming Europe. Highest quality fixed income and derivatives that rise in value when risk assets fall may be relatively more immune.

Within the commodity and currency space, Citi Analysts believe industrial metals could likely fall and the USD could weaken versus G10 currencies but strengthen against most EM currencies.

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