Markets took an immediate hit when U.S./China trade talks stalled. Recent global data for April suggests that consumer and business sentiment had already declined. Now consider “second round” effects on asset classes – and other policy.


1. Trade concerns haven’t just had an impact on equities: fixed income, FX and other markets are also in focus.

Equity market reaction to the escalating U.S. China trade dispute has already brought S&P500 valuations below recent historical averages (page 6). It has also had an impact on the fixed income market, depressing core government bond yields (thanks to investors’ search for safety) and, in the corporate space, pushing up U.S. high yield spreads (page 7). Despite worries around Iran, oil prices have been held down by concerns about the implications of the trade dispute for global economic growth and thus oil demand. Meanwhile, the gold price has been a rare gainer – if possibly only temporarily (page 8).


2. The dispute is already impacting business and consumer confidence: this will feed through into output data, across multiple regions.

One question now is how much the trade dispute will affect consumer and business sentiment and thus future output and consumption. “Hard” data (i.e. output, not sentiment-based) obviously reaches only as far as April, before the trade talks broke down: however, this already indicates slower growth in many areas – for example U.S. retail sales (see page 2) and Chinese industrial production, fixed asset investment and retail sales (page 5). Second-round effects, as poorer sentiment following the breakdown in trade talks feeds through into “hard” data for May and beyond, are certain. One unknown is to what extent this will evolve beyond a simply U.S./China dispute: at the time of writing, markets are awaiting President Trump’s decision on the Section 232 investigation around European autos tariffs: we consider the importance of this for Germany on page 4.


3. Trade policy will have potential implications for monetary policy via inflation and output: however major Fed shifts look unlikely.

Trade policy cannot, of course, be considered in isolation – it will have an impact on monetary policy (most immediately, through higher import prices pushing inflation) and, eventually, fiscal policy (if governments use this route to respond to lower overall levels of economic growth). The general assumption is that the Fed will look through any tariff-related increase in U.S. inflation as a temporary phenomenon and keep policy on track. ECB policy is likely to be less affected by inflation expectations, given that inflation remains well below the target rate. Inflation is likely to be less of a concern for the People’s Bank of China (PBoC) than its efforts to assist other Chinese government agencies ensure an economic soft landing: stimulus efforts will likely increase if Chinese economic growth slows further.


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