Concerns about US tariffs on Mexico may have waned but there are enough problematic US trade scenarios for Citi strategists to be concerned about the impact on the financial markets.
‘Tensions are mounting and the outcome looks more likely to be driven by politics than economics,’ writes Citi’s global macro strategy team, led by Mark Schofield, in a note to clients this week. US President Donald Trump ‘is likely to continue to take a hard line,’ warns the note.
Citi sees Trump applying 25 percent tariffs on the remaining Chinese goods not yet hit – what Citi calls a ‘shock and awe’ strategy in the run-up to a deal – with duties on automobile imports and increased tensions with Europe and Japan.
If, in turn, the Fed does not cut interest rates, this leaves markets on course for a ‘full scale bear market’ in the S&P 500, warns the note, with all the devastation such a scenario can bring.
The good news, however, is that the outlook ‘may be transitioning’ to a different scenario, where no trade deal is forthcoming with China but the Fed provides 75 basis points worth of rate cuts. That would see new highs on the S&P 500.
A third scenario has a trade deal being struck at the G20 summit at the end of this month in Japan, where Trump may meet with Chinese President Xi Jinping. That would cause equities to surge, with emerging markets ‘significantly outperforming’ and yields seeing a rise.
