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Impact of an Escalating Global Trade War on US Stocks

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Impact of an Escalating Global Trade War on US Stocks

For investors as well as traders, trade-related topics have become a front-burner issue. After the US announced 25 percent tariff on up to $60 billion of Chinese exports, it was seen that the equity prices and Treasury yields went down. However, both the countries have expressed interest in reconciling differences. When the market opened on 26 March, reversed path was observed.

Investors should allocate more of their assets to Treasury securities that are likely to experience a further decline in yields if a global trade war erupts. Meanwhile, equities would bear the burden of the impact of this trade moves by the US. But the question arises that whether the outcome for bonds be different if China follows through on its threat to sell some of it’s $1.2 trillion holdings of Treasuries? This kind of moves would still not prevent a decline in bond yields as it would also cause global investors to rush to havens.

However, there is a path that would reconcile the US’s political objectives and the requirements of global investors. By expanding markets rather than restricting imports, President Donald Trump could achieve his campaign promise of boosting economic growth. He can also create jobs with this strategy. This measure would help in bringing about greater market share for US companies and will be welcomed by markets.

Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer took the first step. They wrote a letter to Liu He, China’s economic czar. In a letter, they have asked for a reduction in tariffs on automobiles, increased purchases of US semiconductors and a further opening of the Chinese financial sector for American companies.

After the Liu had expressed concern that a trade war would hurt both countries and sought steps to reach a compromise, investor concern eased over the weekend. It is believed that exports account for about 20 percent of China’s gross domestic product. Thus, trade restrictions could significantly slow the pace of economic growth.

It is said that the relief of investors is unlikely to last in the absence of concrete measures to open markets. At the beginning of the financial year, the Bloomberg Politics said that the Trump administration may restrict Chinese investments in sensitive areas of the technology sector as well. This report impacted by lowering 2.9 percent of the tech-heavy Nasdaq Composite Index on the same day.

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