The potential of full-blown trade war between China and the US will continue to impact capital markets by creating growing volatility, according to Natixis Investment Managers.
Natixis’ chief market strategist, Dave Lafferty, stressed that President Donald Trump’s trade talk took a darker turn in recent weeks as he doubled down on tariffs, which moved from the “proposal” stage to reality, and was “actively considering withdrawing from the WTO”.
“Until five or six weeks ago, I viewed Trump’s tough trade talk as mostly rhetoric designed to be an opening gambit for getting modest trade concessions,” he said.
“Ultimately, I believed Trump wanted some “small wins” that he could take back to his populist base in the Midwest, but he wasn’t looking to do any real damage. Today, I’m less sanguine.”
Additionally, the real risk existed that trade arguments would spill over in capital markets, with the current account being mirrored by the capital account which would have currency and interest rate implications.
“Yes, the Chinese sell a lot more goods to the US than they buy from the US, but they also buy a lot of the US Treasury debt that keeps our interest rates in check,” Lafferty noted.
According to him, the Chinese were unlikely to go on a Treasury “buying strike” as this would cause their currency to appreciate too much.
At the same time, he said, this highlighted how the situation could spill over into rates and FX values which may have an even larger effect on US growth.