13 to 19 May: Will the quarrel ever end?

Last week we pointed out that global investor sentiment deteriorated because of the escalating trade tensions between the US and China, despite the release of encouraging macroeconomic data from the US and China. During the week, risk aversion further intensified as the world’s two largest economies continued to play ‘tit-for-tat.’ As tensions further escalated, several media outlets sounded the alarm that China could off-load a vast amount of US Treasuries to push back against an increasingly impatient President Trump. We are of the view that China will not resort to the nuclear option, because it would have severe repercussions for China itself too. In addition, it would be highly impractical, as China would not find easily any other market with such size and depth. There is a bright side though, which remains underappreciated by the market: the Fed and the PBOC have a pretty good excuse now to maintain accommodative financial conditions in an environment where inflation remains benign and GDP growth decent. In our view, the market will just need find solace in the fact that the overwatch of central banks will stand pat to aid economic growth and floor asset prices, as the chance for extending the olive branch is quite slim anytime soon.

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