How much of a trade war have markets priced in? JPMorgan says it’s a lot

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Markets have been fitful as the U.S. has pursued a global trade war, but it isn’t clear when it the potential and already incurred damage might be priced in.

“Recurring salvos in the trade war and falling asset prices raise the question of how much tariffs could damage the global economy and
what outcome markets price,” JPMorgan said in a note last week.

The investment bank pointed to three scenarios to estimate the hit to global economic growth:

  1. A “trivial” slowdown of 0.2 percent in growth if the U.S. were to impose 10 percent tariffs and no country were to retaliate, it said. To be sure, some countries and regions have already retaliated.
  2. A 0.4 percent reduction in global growth if the countries targeted by the U.S. retaliate with equivalent tariffs, it said.
  3. A larger 1.4 percent “shock” if all countries raise tariffs by 10 percent, it said.

JPMorgan said the second scenario of a limited trade war appeared to already be priced in.

“Global markets already discount this 0.5 percent slowdown and some emerging markets assets price a larger 1 percent cut,” it said. “So
there is value in emerging markets, but only assuming that actual measures will be limited.”

As a caveat, JPMorgan noted that these frameworks will underestimate the likely damage via disrupted supply chains and feedback loops created by tighter financial conditions.

“Clearly, markets carry no cushion for the likelihood that our economists’ estimates are admittedly conservative,” it added, noting that was why it re-started hedges last month to short the Chinese yuan and the Australian dollar/Japanese yen cross.

But it added that its global equity strategists were expecting the “elevated trade uncertainty” wouldn’t overshadow “robust fundamentals,” including companies’ improving cash-flow generation as well as consumers who were seeing strong labor markets, rising wages and rising house prices, while remaining relatively unleveraged.

“With the developed market retail sales now up two months in a row, along with PMI numbers for China, Eurozone flash PMI’s and firming
Taiwan export orders, they recommend buying into trade news-flow’s driven market weakness,” the note said. But it added, the equity strategists recommended keeping some hedges in place: a cautious view on emerging market equities and a preference for the U.S. versus the eurozone.

Additionally, JPMorgan noted that its Japanese strategists believed the recent underperformance in Japan’s equity markets “has run too far,” and they tipped limited downside even if the trade tensions between the U.S. and China were to escalate.


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