The biggest fear for stock markets heats up

Investors' are unlikely to welcome the news that Trump is ramping up the trade war, pursuing more tariffs on Chinese goods. 

President Donald Trump has threatened to hit China with a further $200 billion worth of tariffs, raising fears over a full blow trade war.

Trump issued a statement late on Monday (18 June) saying that US officials were in the process of finding another $200 billion of Chinese imports to hit with a 10 per cent tariff if China does not backdown from retaliating against previously announced US tariffs.

Should Beijing retaliate further, Trump said, tariffs targeting another $200 billion worth of Chinese goods would be sought.

Commenting on the news, Chris Payne, managing director at GWM Investment Management, said: ‘This is an unexpected move and clearly an escalation in both trade war rhetoric, and downside risk.’

The news was greeted by a sell-off in both US and Chinese equities. European car makers and miners also took a hit, being seen as acutely vulnerable to a trade war.

The escalation of the trade disputes has been top of the list of investors’ fears this year, according to many surveys.

The latest, carried out by Global Advisors for their 2018 Mid-Year Outlook, saw ‘geopolitical/international trade tensions’ top the list of investor concerns.

In the wake of the most recent trade tariff news Miles Eakers, chief market analyst at Centtrip, noted that ‘investors are right to be concerned.’

However, despite citing trade tensions as their biggest fear, most investors, before Trump’s latest tariff announcements at least, appeared bullish about US equities.

According to the State Street survey, ‘investors’ median year-end forecast for the S&P 500 Index is 3.7 per cent higher than it was in December—implying a 4.75 per cent annual return for the index in 2018.’

At the same time, the most recent Bank of America Merrill Lynch Survey showed most investors believe the S&P500 will hit 3000 this year. 

The latest escalation, however, may see some investors change their tune. According to Eakers, ‘any retaliation by Beijing is likely to fuel the escalating trade war with Washington, which will in turn have a negative impact on equities and increase risk aversion.’

The past decade’s global stock market rally, he notes, is under threat: ‘International companies may grow less competitive due to tariffs and the cost of raw materials purchased overseas could rise by 10–20 per cent.

‘It’s highly possible that any further action from the US or China could put an end to the current 10-year bull market run.’

For more on the risks that a trade war presents investors, read our Money Observer’s June edition cover article.  

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