Skewed to the downside: How the trade war is shaping global market risk

Market volatility came back this week in a big way. On today’s episode of Market Week in Review, Head of AIS Business Solutions Sophie Antal Gilbert, and Senior Investment Strategist Paul Eitelman dig in on trade, global bond markets and eurozone economic data.

The trade war story is still the top story

“The trade war has been one of the dominant risk factors impacting global markets basically all year, and we’re continuing to get more and more headlines,” said Eitelman. He focused on the deadline on imposing further U.S. tariffs on the final $300 billion of Chinese imports. “The good news this week,” said Eitelman, “was a little bit of a can kick around exactly when those tariffs may go into effect.” Eitelman explained that for roughly a half to two-thirds of that $300 billion, instead of being taxed on September first, those tariffs may go into effect now on December 15, “which is a positive for the U.S. economy, because a lot of these are consumer goods.” Eitelman noted that by “kicking the can to December 15^th,” U.S. retailers are positioned to stock up their inventories ahead of the holiday shopping season, which will likely pass on slightly lower prices to holiday shoppers. Eitelman added, “That delay of the timeline also means that uncertainty is going to be with us longer. And so this is going to continue to be an important risk factor for global markets from here, but I’d say less bad in terms of the incremental news this week, for sure.”

What’s behind the major moves in government bond yields?

On topic of fixed-income markets, Eitelman pointed out significant moves for global government bonds. He said: “We’ve seen the U.S. 10-year Treasury yield fall all the way down to 1.5% on Thursday’s trading session, which is the lowest it’s been in over three years.” The interest rate moves in Europe may have been even more significant than that, as Eitelman noted that the German 10-year bond yield fell all the way to negative 70 basis points. “It was a record low last week. It’s getting even lower and reaching new records.” He added, “I think these movements in government bonds are very significant. They’ve been troubling the equity market as well, because those very low interest rates are a bearish cue from the fixed-income markets that the global economy is potentially slowing down and that there are risks.”

Eitelman also noted comments from the European Central Bank about the prospect of a sizeable stimulus package in the pipeline.

European economic data points toward downside risk

On the topic of challenges in the European economy, Eitelman noted that the eurozone is facing multiple headwinds at the same time. He said: “They have their unique problems around the uncertainty related to Brexit, which is ongoing around that October 31^st deadline. But on top of that, Germany in particular is facing a lot of uncertainty from the trade war itself, because they have significant exposure to China in terms of their factory output. And so they’ve been hit with a little bit of a double whammy.”

Eitelman specifically called out the slowing of the German economy, which in the second quarter of 2019, he said, delivered real GDP growth of minus 0.3%. “I don’t think we want to say the German economy is necessarily in a recession yet, but obviously they’ve certainly slowed here, like the rest of the world. And that bears close watching. Given Germany is the largest region within the eurozone block, that slowing certainly has the European Central Bank’s attention right now and is a major component of why they’re talking about delivering more stimulus to push back against those growth concerns.”

Is there a solution in the future? “It’s a pretty complicated dynamic at the moment,” said Eitelman. “I think that trade war uncertainty is the major thing that we need to get through. And ultimately a deal would be what we need to lift the clouds and see stronger growth. For now, it’s an environment where risks are skewed modestly to the downside.”

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