NN IP: Markets fear new tariffs

The continuing fear of additional trade tariffs has been the main theme for markets in the last few days. While macro data continue to show that the global economy is consolidating at a comfortable level, and central banks have provided clear guidance for the next few months at least, the uncertainty around the next steps in the global trade saga has been the dominating force. 

On Friday, President Trump threatened to implement higher tariffs on European-made cars. In response, the EU Commission’s Vice President Jyrki Katainen said Saturday that “if they decide to raise import tariffs, we’ll have no choice but to react”.

At the same time, the US sent mixed signals about the possibility of implementing new restrictions on Chinese investment in the US. Yesterday President Trump suggested that he would scrap plans for new restrictions on Chinese investment in US technology.

This followed rumours over the weekend that the US Treasury is preparing rules that would block firms with Chinese ownership of least 25% from buying US companies involved in “industrially significant technology”.

Markets slightly lower

Over the last few days, economists have tried to calculate the impact of additional trade tariffs. So far, the overall conclusion is that the direct impact of the tariffs already implemented and a new round to come, will be limited.

However, the real risk is more long-term in nature. The Trump administration’s view on trade and international cooperation in general poses a threat to the existing governance system that is based on a common set of global rules.

In addition, there are direct market threats through two channels: a break in global value chains, and a negative impact on business confidence and investments. The impact of the first channel is very difficult to assess, because we have to account for all kinds of sector and company specifics. The impact of the second will surely be negative, regardless who and where you are.

Markets don’t like uncertainty and have traded lower over the week. Equity markets are down, with most pain felt in Europe and emerging markets. Spreads were generally higher too, emerging markets again taking the biggest hit.

Small risk-on stance

We haven’t changed our allocation, and retain a small risk-on stance. Our equity overweight still has some cyclical support, but it is mainly based on positive momentum and sentiment indicators. Of course, we continuously weigh these against the impact that trade tensions may have on future changes in sentiment.

Our real estate overweight has stronger and broader support. However, this has been recognised by other investors and is reflected in some signs of overt bullishness towards the segment. Short-term signals caution us from adding to this position.

Our underweight in spreads is supported by our quantitative signal set, and with current pressure on spreads, this continues to be a good position.

Despite a move lower in Bunds over the week, we hold on to a small underweight duration. We feel that we are on the lower side of the trading range, caused by the risk-off sentiment on trade tariffs, and we don’t think it is appropriate to change now. Furthermore, longer-term economic and monetary policy normalisation still point to higher yields into year-end.