Markets Insights

Q3 off to volatile start as trade spat escalates

A worker cutting steel at a factory in China's eastern Anhui province. Additional US tariffs of 25 per cent on US$50 billion (S$68 billion) of China-made goods could cause export declines of up to 40 per cent for the affected goods in the following 1
A worker cutting steel at a factory in China's eastern Anhui province. Additional US tariffs of 25 per cent on US$50 billion (S$68 billion) of China-made goods could cause export declines of up to 40 per cent for the affected goods in the following 12 months, experts at Standard Chartered Bank said.PHOTO: AGENCE FRANCE-PRESSE

US-China row in spotlight with more tariffs on Chinese imports set to kick in; oil price shock is another major risk

The United States trade spat with the world's largest economies is likely to continue to haunt investors in the third quarter, with escalating rhetoric by leaders fuelling market volatility.

The US-China trade conflict is about to shift into a higher gear, with additional tariffs on Chinese imports kicking in on Friday.

Big market swings were evident last Friday, which saw the Dow Jones Industrial Average bounce back with more than 200 points of intraday gains, before settling 55.36 points, or 0.2 per cent, up at 24,271.41. It was up 0.7 per cent for the quarter, but down 1.8 per cent since the start of the year.

The two other major US stock indices - S&P 500 and Nasdaq - also climbed up a notch, with the latter finishing up more than 6 per cent for the second quarter, or up 8.8 per cent since the start of the year.

"US-China trade relations will stay in the spotlight this week," said United Overseas Bank economists Alvin Liew and Heng Koon How.

European Central Bank president Mario Draghi reportedly warned European Union leaders that an escalating trade row between the US and the world's biggest economies may have a larger impact than policymakers and investors expect, given the complexity of intertwined global supply chains.

UNINTENDED RESULT

An unintended consequence is that countries in China's supply chain would be indirectly hurt, although some countries might also benefit from the US-China trade dispute by replacing China as exporters to the US.

STANDARD CHARTERED BANK EXPERTS, on additional US tariffs on Chinese goods.

His comments came days after US President Donald Trump threatened to deal what could be a damaging blow to the German economy by imposing a 20 per cent tariff on car imports from Europe.

The risk prompted the EU to react with a joint statement last Friday, vowing an unwavering response "to all actions of a clear protectionist nature".

Experts at Standard Chartered Bank estimated that additional US tariffs of 25 per cent on a total of US$50 billion (S$68 billion) of China-made goods could cause export declines of up to 40 per cent for the affected goods in the following 12 months.

"An unintended consequence is that countries in China's supply chain would be indirectly hurt, although some countries might also benefit from the US-China trade dispute by replacing China as exporters to the US.

"Also, some countries involved in China's supply chain, particularly Malaysia and Vietnam, could also benefit by exporting directly to the US instead," they said, adding that an oil price shock is another major risk to the global economy.

Trade-dependent economies such as Singapore, South Korea and Hong Kong would see the largest deterioration in their current-account positions when oil prices rise over a two-year horizon, they warned.

A version of this article appeared in the print edition of The Straits Times on July 02, 2018, with the headline 'Q3 off to volatile start as trade spat escalates'. Print Edition | Subscribe