5 to 11 August: The trade dispute goes on

Although the economic diaries in the US and China were virtually empty last week, markets did not have time to recuperate, as the trade tensions between the US and China further escalated. A week ago we argued that the trade tensions entered a new chapter, as the Chinese renminbi crossed the psychologically important level of 7 vs. the greenback. In the new chapter of the trade war saga, the US formally labelled China as a ‘currency manipulator.’ Later, President Trump claimed that the trade negotiation scheduled for September could be cancelled. As a retaliatory measure, China banned the imports of agricultural products from the US.

The fact that the opposing sides have resorted to more aggressive retaliatory measures implies that the probability of a policy mistake-driven economic slowdown has markedly increased, in our view. As a result of the increased degree of economic uncertainty, the appetite for risky assets have abated, as investors sought safe haven assets. This week the macro data from the US and China will allow the market to re-assess the prospects for the world economy.

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