How to determine the tipping point of trade war impact

by: , Managing Director, Economist, and Portfolio Manager, New York Life Investment Management

We recently published a blog post covering our view on trade.

Since then, the news cycle has continued down a “trade war” path, as the Trump Administration’s tariff threats have intensified. Markets on Friday saw Treasury yields fall and the dollar weaken, suggesting some investor fears of future inflationary pressure, due to the threatened measures.

We maintain the view that trade rumors’ impact on markets will be short-lived, unless tangible policy measures are enacted. Equity pricing has been volatile – particularly in emerging markets – but global trade volumes remain healthy. Economic fundamentals remain strong, putting a floor on trade’s market impact for now.

That said, tariff threats worth nearly $500 billion in goods is a sizable threat. We believe that such measures, if enacted, would impact markets less through their impact to GDP growth and more through their secondary impacts to supply chains, financial markets, and retaliatory governmental policies.

We are monitoring some key indicators to determine whether the impacts of trade tensions are moving into these secondary impacts:

Monitor impacts to business

So far, business confidence remains strong, despite broad-based concerns about potential trade measures. Look for sustained decreases in business confidence to determine when the impact of a potential trade war outpaces the positive impacts of tax and deregulatory policies.

U.S. CEO Confidence

Sep 1998 – Jun 2018

Source: Thomson Reuters DataStream US Census Bureau 7/23/18. The Conference Board CEO Confidence is based on a survey of approximately 100 CEOs in a wide variety of industries. It details Chief Executives’ attitudes and expectations regarding the overall state of the economy as well as their own industry. The confidence index reading of more than 50 points reflects more positive than negative responses. Past performance is no guarantee of future results. An investment cannot be made in an index.

Capital expenditure plans

Jul 1998 – May 2018

Source: Thomson Reuters Datastream US Census Bureau 7/23/18. The Manufacturers’ Shipments, Inventories, and Orders (M3) survey provides broad-based, monthly statistical data on economic conditions in the domestic manufacturing sector. The survey measures current industrial activity and provides an indication of future business trends. Past performance is no guarantee of future results. An investment cannot be made in an index.

Consider dollar knock-on impacts

Consistent dollar strength could create meaningful market pressures, particularly for global companies or for emerging markets’ governments servicing dollar-denominated debt.

U.S. Dollar Index (DXY)

Jul 2014 – Jul 2018

Source: Thomson Reuters Datastream 7/23/18. The U.S. dollar index (USDX) is a measure of the value of the U.S. dollar relative to the value of a basket of currencies of most of the U.S.’s most significant trading partners. Past performance is no guarantee of future results. An investment cannot be made in an index.

Watch for strains among China’s partners

Supply chain links between China and other Asian countries such as Taiwan, South Korea, Singapore, and Malaysia could create strains on these countries’ companies, government finances, and financial markets.

China – Asian supply chain equity markets

Dec 2017 – Jul 2018

Source: Thomson Reuters Datastream 7/23/18. Price performance of various Asian financial markets. Rebased at 100 on 12/30/2017. Past performance is not indicative of future results. An investment cannot be made in an index.

Opinions expressed are current opinions as of the date appearing in this material only. The information and opinions contained herein are for general information use only. New York Life Investments does not guarantee their accuracy or completeness, nor does New York Life Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Past performance is no guarantee of future results.

About Risk

All investments are subject to market risk, including possible loss of principal. There is no assurance that the investment objectives mentioned will be met. Diversification cannot assure a profit or protect against loss in a declining market.

Foreign securities can be subject to greater risks than U.S. investments, including currency fluctuations, less liquid trading markets, greater price volatility, political and economic instability, less publicly available information, and changes in tax or currency laws or monetary policy. These risks are likely to be greater for emerging markets than in developed markets.

Treasury Securities are backed by the full faith and credit of the United States government as to payment of principal and interest if held to maturity.

The 10-year Treasury note is a debt obligation issued by the United States government with a maturity of 10 years upon initial issuance. A 10-year Treasury note pays interest at a fixed rate once every six months, and pays the face value to the holder at maturity.

The FTSE Bursa Malaysia KLCI, also known as the FBM KLCI, is a capitalisation-weighted stock market index, composed of the 30 largest companies on the Bursa Malaysia by market capitalisation that meet the eligibility requirements of the FTSE Bursa Malaysia Index Ground Rules.

The Korea Stock Exchange is a division of the much larger Korea Exchange that includes a stock exchange, futures market, and stock market.

The FTSE Straits Times Index (STI) is a capitalization-weighted stock market index that is regarded as the benchmark index for the Singapore stock market. It tracks the performance of the top 30 companies listed on the Singapore Exchange.

The Taiwan Stock Exchange (TWSE) is the securities trading center in Taiwan.

The U.S. dollar index (USDX) is a measure of the value of the U.S. dollar relative to the value of a basket of currencies of the majority of the U.S.’s most significant trading partners. This index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies.

New York Life Investments is a service mark and name under which New York Life Investment Management LLC does business. New York Life Investments, an indirect subsidiary of New York Life Insurance Company, New York, New York 10010, provides investment advisory products and services. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. NYLIFE Distributors LLC is a Member FINRA/SIPC.

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Poul Kristensen, CFA

Managing Director, Economist, and Portfolio Manager, New York Life Investment Management

Poul Kristensen, CFA is Managing Director, Economist, and Portfolio Manager with New York Life Investment Management’s Strategic Asset Allocation & Solutions (SAS) Group

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