Market focus this week was again on trade policy, with the recent retaliation from China and further tariffs by Trump in defence of US technology. US tariffs were softer than initially expected, at USD50bn rather than USD60bn. China's response made clear that the US agriculture, auto and aircraft industries would be hit. According to China Daily, 62% of soybean exports from the US go to China. Further, we note that an important swing state, Iowa, is a major producer of soybeans in the US. In our view, this indicates a carefully chosen retaliation by China in a 'tit-for-tat' response. The economic impact should still not be overestimated, with approximately USD50bn of Chinese goods corresponding to 10% of Chinese exports to the US, or 0.4% of China's GDP.
The first two rounds of the US-China trade conflict are now over, and we enter uncharted territory after the rounds that have been running according to the script laid out by Trump and China over the past seven to eight months. We see two scenarios that could unfold : (1) negotiations and a 'grand bargain' and (2) Trump strikes back again and a trade war begins. If Trump keeps new communication to a minimum, we would likely see markets calm down. Next step is the US hearing period (lasting until 15 May). However, it is not impossible that we may have seen the worst on the trade front for now. See Research: Two scenarios for the US-China trade conflict , 4 April 2018.
For equities, volatility has been high in recent days amid round two of the 'trade war', but focus should soon turn to the quarterly reports. Although it's too early to reach any conclusion, we note that the first reports look promising, with marked positive surprises in both revenues and earnings.
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