How to determine the tipping point of trade war impact
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.
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