The scattershot approach to trade tariffs has caused uncertainty and confusion in the markets.
After all the tough talk on trade wars that are easy to win, the reality of how that takes place is finally starting to rattle markets. Tariffs are taking their toll on Chinese and European markets, but also raising uncertainty for US companies alike, witness Harley Davidson. Trying to decipher the US policy toward China or any other country for that matter is no easier than many of the other confusing and conflicting messages coming out of the administration. On China, we are hearing conflicting views from WH Trade Advisor Navarro and Secretary of Treasury Mnuchin, with President Trump shifting back and forth. Meanwhile, China’s President Xi is telling CEO’s of US and European multinationals that he is going to strike back. “In the West you have the notion that if somebody hits you on the left cheek, you turn the other cheek,” the Chinese leader said, according to the people. “In our culture we punch back.” Both the Chinese stock market and the Yuan are taking a beating with the Shanghai Index entering bear market territory over the past 5 months.
Hedge funds are smelling blood and sounding alarms of similarities to both the dot-com bubble and the 2008 financial crisis. Both anecdotal and empirical evidence is pointing toward increased risk. In the case of Alan Howard, the market turmoil has led to a 37% gain last month alone. After dropping below 12 earlier this month, lows not seen since January, the VIX briefly jumped to nearly 20 on June 25th and is sitting at 17.5 at the time of this writing. The Goldman Sachs barometer of risk appetite is at its weakest since July of 2017, after peaking in late January of this year. Together these point toward deteriorating market conditions that strongly suggest a re-examination of risk scenarios and correlation assumptions moving forward.
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