US-China trade wars have been re-invigorated with extra tariffs on Chinese products worth $200bn and threats of 25% tariff on a further $300bn. This prompted comments from President Xi Jinping, calling on the nation to embark on a new 'Long March'.
This indicates the inclination of the Chinese government to embark on a protracted trade war and prepare the country for adverse conditions arising from this. Given the rhetoric from both leaders, the initial salvoes could quite quickly become a war of attrition, which harms the global economy, not only through reduction in global growth, but also through polarisation between exporting and importing nations, specifically those exporting to the US.
Notwithstanding other local geopolitical risks, the US has been the leader in terms of economic growth, with lower unemployment and inflation. However, cracks have started to show in the manufacturing side, while the consumer side remains strong. While unemployment remains in good shape, there are signs the trade war started to bite back, with a recent spike in the job cuts in auto, industrial goods and retail sectors.
In general, economic conditions still look favourable for the US. In addition to improving fundamentals in Europe and other developed equity markets around the world, we feel confident about equities in general.
Central banks globally maintain an accommodative stance. This, along with lower-than-expected global inflation and lower oil prices, have helped the continuous grind of yields downwards.
The recent trade scrimmages saw sentiment move towards pessimism. In addition, the market is currently pricing in cuts by the Fed this year. Expectation of lower rates in the US and ‘safe haven' trades have driven developed government bonds yields to reach new lows.
Abhi Chatterjee is head of asset risk modelling at Dynamic Planner