As the US-China trade war escalates, stock markets have been shaken but not stirred

A mere 3 per cent drop in the S&P 500 this month, despite the escalation in the US-China trade war, indicates that markets have not adequately grasped the risk that the conflict poses

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Trader Thomas Ferrigno works on the floor of the New York Stock Exchange on May 17, 2019. The current level of asset prices does not reflect the increasing probability of a protracted trade war. Photo: AP

Published: 2:00pm, 23 May 2019Updated: 10:24pm, 23 May 2019

How concerned are financial markets about the renewed escalation of the trade war? A cursory glance at some of the key gauges of market performance suggests that US President Donald Trump’s impulsive decision on May 6 to threaten to raise tariffs on all Chinese imports to 25 per cent, followed by the White House’s two-pronged attack on China’s Huawei Technologies – curbing its access to America’s market and placing the firm on a banned entity list – has rattled investors.

Since May 3, the MSCI Emerging Markets equity index has plunged nearly 8 per cent, reducing the gauge’s gains since the start of this year to 3.3 per cent. Chinese stocks, meanwhile, have fallen for the past four weeks, with the CSI 300 index of large-cap mainland-listed shares down 11.4 per cent since April 19.

What is more, the yuan – which Nordea, the Scandinavian financial services group, dubs “the most important gauge worldwide currently” – has slid 3.2 per cent against the US dollar since April 17 and is once again close to the psychologically important 7.0 mark.

More worryingly, the Trump administration’s offensive against Huawei has accentuated concerns about a “digital iron curtain”, dividing the world into two separate technological spheres.

The Philadelphia Semiconductor Index – a US equity gauge that tracks companies which design, distribute and manufacture semiconductors – has lost 13.5 per cent so far this month, putting it on course for its worst month since the global financial crisis. As recently as April 24, the index was trading at an all-time high.

The dramatic sell-off in semiconductor shares could be the canary in the coal mine. According to Bank of America Merrill Lynch’s latest fund manager survey published earlier this month, a “long”, or overweight, position in US tech stocks is the most popular trade in markets, thus providing ample scope for further price declines if Washington and Beijing fail to make significant headway in their negotiations by the end of June when the G20 summit in Osaka will be held.

As the US-China trade war escalates, stock markets have been shaken but not stirred

.css-1mniedq{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;}A mere 3 per cent drop in the S&P 500 this month, despite the escalation in the US-China trade war, indicates that markets have not adequately grasped the risk that the conflict poses

A mere 3 per cent drop in the S&P 500 this month, despite the escalation in the US-China trade war, indicates that markets have not adequately grasped the risk that the conflict poses