Chief Investment Strategist and Chief Economist
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There are several near-term political and trade deadlines which may raise uncertainty further
We previously noted that an announcement that the US would apply tariffs to auto imports would constitute an escalation in its confrontation of trading partners.
While the results of a ‘US national security’ assessment of autos trade has yet to be released, President Trump’s comment via Twitter this past weekend that the US would apply a 20% tariff on European cars if EU “tariffs and barriers are not soon broken down” suggests a widening confrontation ahead
Separate actions aimed at reducing US/Chinese cross-border investment and added tariffs continues to suggest the U.S. is broadening its demands rather than seeking a quick victory with modest changes.
While the US was reportedly close to making agreements over NAFTA and a package of Chinese measures, how willing the world will be to accommodate greater changes to existing US trade agreements is an open question.
We continue to see the US-led trade fracas as unpredictable, and not the sole issue investors
should focus attention on. Over the medium-term, it is far from certain that tariffs will be the largest market issue.
Markets have to some degree braced for poor trade news. Nonetheless, there are several near-term deadlines for markets to focus on which may raise uncertainty further.
On the trade front, the US will announce new Chinese trade restrictions at month end and potential US autos-sector measures in July. Retaliation should be expected.
On the political front, the German coalition government faces near-term risks over EU standards for the treatment of migrants and asylum seekers. Mexico’s Presidential election is one week away.
With summer markets typically volatile, low volume trading periods, investors may want to consider hedging particular risks above, or in our view, hedging for broader risks in the equities asset class over the near term. While none of the issues above assure negative outcomes, US equity implied volatility has fallen roughly 65% from 2018 highs.
The risks associated with the breakdown of international policy cooperation discussed in our Mid-Year Outlook deserves consideration.