US-China trade war sharply escalates

Yesterday evening, US President Trump announced to impose a 10%
tariffs on the so far untaxed imports from China worth about US$
$300bn, beginning on September 1. The decision was obviously
made on the return of Secretary Mnuchin and USTR Lighthizer from
trade talks in Shanghai, where both sides met for the first time in
person since trade talks were resumed.

Highlights:

  • Yesterday evening, US President Trump announced to impose a 10% tariffs on the so far untaxed imports from China worth about US$ $300bn, beginning on September 1, while trade talks should go on.
  • We expect China to retaliate in a measured approach.
  • The new tariffs could lead to an additional loss of GDP growth by about 0.5 pp in China over the medium term. Thus, Beijing will likely step up monetary and fiscal support in a compensatory way.
  • As the new tariffs will hit (so fare spared) US consumption goods imports much more significantly, the measure will likely lead to some upward pressures on inflation in the US. This will also imply a negative impact on US growth, and thus renders Fed cuts more certain.
  • In an initial reaction, US stock markets lost about 1%, China’s markets about 1.4%. However, in our opinion, the 10% increase is not large enough for the knee-jerk reaction to morph into a risk asset meltdown. Given the heightened risks on growth, and the likely bolder easing from central banks, bond yields remain skewed to the downside.
  • The key question is whether Trump will eventually ratchet tariffs up from 10% to 25%. This is not our central scenario, given the associated risk of a US hard landing or even recession ahead of the November 2020 election. However, such a bold move would change our views on risky assets (equities and credit).

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US-CHINA TRADE WAR SHARPLY ESCALATES

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