Markets Do Not Believe Trade War Coming

Here's a look at China, South Korea, Japan and Germany, four export powerhouses. China is of course most likely to suffer in a trade dispute with the United States, but if China deals with the U.S. and imports more U.S. cars (one possibility) it will likely import less from somewhere else. Global trade isn't growing rapidly, rebalacing trade at this moment means redistributing trade.

Whatever one's opinion on the matter, there is no sign of investor concern in any of these charts. That could change at any time and markets are notoriously wrong at key turning points, but there is bearish signal from these charts with the exception of DXJ, but that's mainly due to the strengthening yen. A stronger yen is a bearish signal, but not because of trade.

The lack of concern might be because many of the people screaming loudest about tariffs also screamed loudly about Brexit and Trump's election, and were shown to be wrong. It may be that investment managers support tariffs, but don't want to go on record publicly because they either dislike Trump or don't want to get into a debate with economists. It may be that people complaining about tariffs don't really believe their rhetoric or lack investment capital (no skin in the game). It may be that the sudden thaw in North Korea relations (assuming North Korea isn't simply buying time, a good assumption given their track record) finally taught investors to watch Trump's actions more than his rhetoric, that negotiations with China are the most likely outcome. It may be investors think Trump is all bluster and will back down when the global push back hits. Whatever the reason, if you expect a negative market reaction, the market is priced right for going short.

I don't think a tariff dispute will be a single event like Brexit and the U.S. presidential election. Instead, it will likely drag on as the North Korea situation did. If China fires back with fiery rhetoric or a strong retaliation, even if it is also a set up to negotiations, I suspect markets will react poorly. It will be remarkable if they don't. Several charts including China, Germany and Japan Hedged (DXJ) aren't far from support. South Korea (EWY) would need to fall 20 percent to hit support. China (FXI) needs to slid a little more than 7 percent to fall below support.

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