Trade war, Brexit and slowdowns in China and Germany are likely to curb the stock market euphoria

World stock markets have had the bit between their teeth since the turn of year, but are investors getting too far ahead of themselves and heading into a new day of reckoning? Too much is already factored into the US and China clinching a trade deal soon and it might be a classic case of “buy the rumour and sell the fact” for many investors questioning the logic of markets heading back towards last year’s all-time highs. Could the stock market’s euphoria soon be upended?

There are too many other variables at play, not least the overwhelming body of evidence showing the damage which has already been done to global economic confidence after nearly two years of crossfire between Washington and Beijing. The World Trade Organisation’s recent annual forecast has concerns that global trade is already struggling, with export and import flows down 0.3 per cent in the fourth quarter of 2018. According to CPB Netherlands data, global trade volumes were down 1 per cent in January from a year ago. And the trend seems to be accelerating.

According to the WTO, US-China trade accounts for about 3 per cent of world exports, but global trade in automobiles accounts for about 8 per cent. In which case, if US President Donald Trump gets his way with plans to impose trade tariffs on foreign imported cars to protect the US auto industry, the relative shock to the global economy could be that much greater. It is already sending potential shock waves around the industrial world.

Europe could be highly vulnerable, especially with Trump threatening to slap tougher trade sanctions on goods from the European Union in order to wrest better concessions for the US. Europe is in a precarious position, overshadowed by “dieselgate”, Germany’s auto emissions scandal, and the threat of a no-deal Brexit, both posing serious strains on Europe’s car industry and general economic outlook.

Germany managed to avoid technical recession at the end of last year by the skin of its teeth but is not out of the woods. Chill winds from China’s economic slowdown are being felt in Germany and recession risks still loom large. Most of Germany’s forward leading indicators already underline that the economic pendulum is tilting towards more economic weakness ahead. Machine tool orders from abroad dived 13 per cent in February from a year ago, a mark of falling demand for German industrial goods from China and an ominous portent for future world trade prospects.