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
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.
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.
Still, broader sentiment in stock markets has held up surprisingly well, given the degree to which US-China relations have deteriorated and the dire consequences of a full-blown trade war for the global economy.
For all the escalation in trade tensions, the MSCI All-Country World Index – a leading gauge of stocks in developed and developing economies – has lost only 3.5 per cent so far this month, leaving the index less than 8 per cent shy of its record high set in January last year. The benchmark S&P 500 index, meanwhile, stands 3 per cent below its latest all-time high reached on April 30.
Volatility in equity markets, moreover, remains subdued, with the VIX Index – Wall Street’s so-called “fear gauge” which measures the anticipated volatility in the S&P 500 – currently standing below 15, only several points above its historical low.
As JPMorgan rightly noted in a report published last Friday, “the global market correction remains mild by the standards of this trade war”. The question is whether the current level of asset prices adequately reflects the increasing probability of a protracted, full-scale trade war.
Markets are so far unwilling to price in a long, all-out trade conflict, partly because investors are convinced it is in both countries’ interests to strike an agreement as soon as possible. Yet, even if an 11th-hour deal materialises, the geopolitical and commercial tensions between China and the US will persist.
For some time now, investors have struggled to gauge the market implications of a trade war, mainly because of Trump’s unpredictability. While traders were burnt at the end of last year by being overly pessimistic, a 3 per cent fall in the S&P 500 this month in the face of a rapidly intensifying economic conflict between America and China smacks of complacency.
Nicholas Spiro is a partner at Lauressa Advisory