Trade
Following the escalation of the US-China trade war, the Reserve Bank of Australia is priced to cut rates most aggressively among its G10 peers. Across the Tasman Sea, the Reserve Bank of New Zealand has already cut rates aggressively, but the economy has yet to respond to this policy easing. This Special Report will examine the prospects of monetary policy for both of these central banks.
The policy-induced decline in consumer confidence has spread to businesses and investors, increasing the probability of a recession even if the administration reverses field on its aggressive tariff measures. We reiterate our defensive asset allocation recommendations.
Upgrade the odds of a full-scale war in the Taiwan Strait from 5% to 10%. Rapid escalation of US-China economic war raises the probability of tensions spilling into the military-strategic domain. Investors should buy insurance against this tail risk while it is cheap. Meanwhile, use this year’s trade shock and equity volatility to increase allocation to EM manufacturing states.
Europe’s deflation problem is getting harder to ignore. This week’s ECB cut is just the beginning — tariffs, the euro’s rally, and softening demand all point to more easing ahead. We explain what it means for yields, equities, and EUR/USD.
Europe’s near-term outlook remains clouded by uncertainty, even after the tariff reprieve. Our latest update breaks down why the risks to growth, profits, and financial conditions are still skewed to the downside — with Sweden standing out as a key bellwether.
This week, we look at the sustainability of the HKD peg as the next whale to move markets, given what is happening to tariffs. After careful analysis, our bias is that it is here to stay. With the DXY dipping below 100, we are likely to see a rebound, which is actually bad news for the Hong Kong region of China, since it will tighten financial conditions. We have no new short-term trades, but if the peg broke, you want to be short HKD/JPY.
The combination of dollar weakness and rising US yields suggests global investors are questioning the safe-haven status of US Treasuries.
Barring a dramatic further de-escalation of the trade war, the US and much of the rest of the world will enter a recession over the next few months. Investors should remain defensively positioned for now.
China’s aggressive retaliation against U.S. tariffs will enable President Trump to shift from punishing allies and redirect the trade war toward China. If Beijing does not react to the latest tariffs by doubling its fiscal stimulus, it indicates they are planning something different, as China will encounter economic destabilization. The likelihood of a hybrid military pressure on Taiwan will rise.