Global equity markets hit by rising trade tensions

Key points

• Shares fall for second month
• Fears US-China trade war could damage economic growth
• Washington and Beijing announce tit-for-tat measures
• Bond yields drop back

Global stock markets fell for a second month as worries the world could be heading for a trade war began to escalate after a series of tit-for-tat announcements saw the US and China vowing to place restrictions on each other’s goods.

The MSCI World index returned -2.24 per cent in local currencies in March, which equated to -3.86 percent in sterling terms, as the pound advanced against the majority of other currencies. The decline in equity values was widespread, with all major indices suffering losses.

Leading US technology shares, which had until recently been spearheading a strong rally in equity prices, came off the boil. Facebook shares were rocked as the company admitted it had improperly shared the data of as many as 87 million users with political consultancy Cambridge Analytica.

Amazon shares also fell as US President Donald Trump launched a salvo of tweets against the online retailer, accusing it of dodging taxes and cheating the US Postal Service. Both developments added to investors’ concerns that with many of the major US technology companies enjoying dominant market positions, they were starting to attract ever closer scrutiny from regulators around the world.

By contrast, bond markets, were in better shape as the sharp rise in yields, which had contributed to February’s stock market sell-off, was partially reversed.

Less than a month after the US vowed to slap tariffs on steel and aluminium imports, Washington and Beijing exchanged threats to impose tariffs over roughly $50bn worth of imports. The situation has continued to deteriorate in recent days, with Trump on April 5 instructing the US trade representative’s office “to consider whether $100 billion of additional tariffs would be appropriate ...and if so, to identify the products” upon which to impose them.

At this stage it is difficult to gauge where this process is leading and what the end result will be. Trump has shown with recent comments on potentially raising the goods covered to $150 billion that he is spoiling for a fight, while China for its part has said it is “not afraid” of a trade war. Were that to happen, it would almost certainly result in downward revisions to economic growth forecasts around the world.

But equally, both the US and Chinese administrations have suggested they are prepared to negotiate. Our view is that ultimately Trump, while wanting to be seen to have extracted concessions from China, will not want to hurt his popularity at home with punitive tariffs on for example US agricultural exports. So we expect while the public rhetoric may remain robust, a deal can ultimately be struck behind the scenes.

Nonetheless, even if both sides may be playing a game of brinkmanship, as they try to curry favour with their domestic audiences, this is dangerous. It could result in damaging actions and in the meantime has hurt sentiment.