Money managers say escalation could pose risk to global markets
Wall Street and global money managers have voiced concerns over the escalating trade fight between the United States and China, fearing that the threatened tit-for-tat moves could shatter business confidence and investors' nerve and pose a major risk to global financial markets.
Morgan Stanley economists warned that the moves, while still seen as aiming toward an eventual negotiation, could increase risks of a "protectionist push" and force the markets to reflect elevated uncertainty.
They expected the U.S. markets to remain challenged given the current conundrum investors are facing: whether the tit-for-tat escalation could lead to the point where global trade and growth is meaningfully hampered.
The U.S. investment bank pointed out that the U.S. tactics create risks of escalation with the Trump administration appearing to believe it can achieve a settlement through aggressive tactics, like tariffs, while limiting interim economic damage.
"Trade conflicts can be damaging to the economy through various channels. The most immediate effect can be felt via financial market stress. Elevated volatility suggests heightened uncertainty, which dampens both business and consumer activity－even if there is no eventual follow-through on threats," Morgan Stanley's economists wrote in a research note.
The escalating trade tensions between the world's two largest economies triggered a sharp selloff in global stock markets and commodities earlier this week although the U.S. and European markets managed to stage a turnaround.
In New York, the S&P 500 index has fallen by more than 4 percent in less than a month, hitting as low as 2553.8 this week before recovering some losses.
Commodities, ranging from copper on the London Metal Exchange to corn and soybean futures on the Chicago Board of Trade, also suffered heavy losses and volatile trading this week.
Hong Kong's Hang Seng Index gained 1.1 percent on Friday after suffering a 2.2 percent drop on the previous day. The Shanghai and Shenzhen markets on the Chinese mainland were closed due to the Qingming Festival holiday.
The uncertainties around U.S.-China trade tensions could continue to cast a shadow on global markets and keep investors on edge in the near term, asset managers said.
Medha Samant, investment director at Fidelity International, expected the markets to be on edge in the near term given renewed concerns over the trade wars saga, decline in the oil price and another selloff in U.S. tech.
"The reality is that this will remain as an uncertainty for markets in the short term as it develops every day," Samant said.
U.S. investment bank Goldman Sachs said in a report that China may respond to the U.S. moves with retaliatory tariffs－making business conditions harder for U.S. companies in China－and with foreign exchange policy changes.
The ongoing trading tensions between the U.S. and China reflect the conflicts in the domestic goals of the two countries and the intensified competition between Beijing and Washington in the manufacturing realm, according to the bank.
"Proposed U.S. policies from President Trump, such as border taxes and tariffs, aim to increase local manufacturing, but China's 'Made in China 2025' initiative has a potentially competing goal of increasing local production in areas like planes and semis," it said.
Analysts are also speculating whether China would retaliate by dumping U.S. Treasury bonds as a countermeasure, which was seen as a "nuclear bomb" in the financial markets.
Chen Jiahe, chief strategist at Cinda Securities, said that selling U.S. Treasury bonds could be an option for China but the possibility of such a move seems to be slim at present.
"Selling the U.S. bonds would be a very proactive move by China," Chen said. "China's actions currently are very restrained and are targeted at specific U.S. moves. But if the U.S. crosses the line too much, which seems pretty unlikely right now, China might have to fight back."