“Where’s The Panic”: Why Trade War Hedges Aren’t Working

wheres the panic why trade war hedges arent working

Authored by Bloomberg macro commentator and former Lehman trader, Mark Cudmore

Under the looming threat of a major trade war between the world’s two largest economies, it turns out that successful navigation of financial markets boils down to focusing on facts over speculation. Who’d have thunk it?

The newswires have been dominated by the theme of trade wars for months, but analysts are increasingly finding it difficult to explain asset price moves through that lens.

U.S. equities at five-month highs, gold at one-year lows, the yen at five-month lows and Treasuries having their tightest yield range in almost 20 years on the week that tariffs were implemented. Where’s the risk aversion and the panic? Where’s the haven bid?

It turns out trade wars aren’t a key driver of markets, yet. Economic forecasts aren’t shifting dramatically, policy makers such as the Fed’s Powell aren’t letting the issue drive monetary settings and surprisingly few company owners are making a big deal about it in earnings calls and guidance forecasts.

If your economy or business is struggling, you can blame it on trade wars (whether validly or not), but for most it’s a risk to keep an eye on rather than a key decision input right now.

“Wait a minute!” I hear you cry, “What about China stocks, emerging markets and commodities?” Sure, they’ve been trading terribly for months, but is that more about trade wars or something else?

My colleague Garfield Reynolds provided some excellent analysis to show that China’s equity rout is much more about the domestic deleveraging drive rather than any trade war impact.

"Where’s The Panic": Why Trade War Hedges Aren't Working

In turn, it makes complete sense that both emerging market assets and commodities would suffer during a period of China deleveraging and Fed tightening. No need to attribute it to trade wars even if that further hinders sentiment at the margin.

"Where’s The Panic": Why Trade War Hedges Aren't Working

All this isn’t to suggest that trade wars are irrelevant. They may yet become the dominant driver for all markets and they are already having an impact at the margin — delaying investment decisions, hurting individual companies and disrupting supply chains.

But, traders and investors are also realistic enough to register that the real economic impact of already-imposed tariffs is minor; that there’s a long lag that gives time for compromise before a much larger wave of duties gets implemented; that it’s easier and quicker to unwind tariffs than set them up, which incentivizes a hard-line approach; that China is refusing to intensify the spat by choosing to react rather than take aggressive action; and that Trump has a history of quick policy U-turns, displayed most relevantly in relation to China technology company ZTE Corporation.

The conclusion of all that is quite bullish for many risk assets globally, particularly U.S. equities. Although a corollary is that China’s upcoming policy decisions take on even more relevance than usual.
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