27 May to 2 June: The Tariff Man strikes again

During the last few weeks, we pointed out that the chances of a cease fire between the US and China had become unlikely on the foreseeable horizon. As US President Trump upped the ante last week and slapped a considerable amount of tariffs on Mexican exports to the US, the probability of a near-term global trade truce has decreased even further. The POTUS’ measure caught markets off-guard and triggered massive safe haven flows driving the 10-year US Treasury yield to 2.13% – a low not seen since September 2017. The reason for such a swing in the global investor sentiment is simple: it has become obvious that any country can easily become a target in just a blink of an eye, as President Trump imposed punitive tariffs on Mexico purely for domestic political gains (i.e. not for reasons underpinned by economic ideology). Such policy unpredictability can easily disrupt market sentiment for a protracted period of time.

Thus far, we argued that the global growth story would not be meaningfully hurt by the US-Sino trade dispute. Since the outlook for global trade was contorted, we had to revise our view regarding the impact of the trade tensions on global growth. Countries like Mexico with open economies, weak structural growth potential and very limited room for policy stimulus will face dampening growth prospects. On the other hand, countries relying primarily on domestic structural growth with largely closed economies and policy space to stimulate, such as China, India and Brazil, will go through this episode with greater ease than what the broad market currently prices.

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