In 2018, there have been two major economic themes which have driven markets. The first is positive in that the global economy, led by the US, is continuing to recover, which should lead to tighter monetary policy and higher interest rates, although interest rates are expected to rise slowly. Admittedly, there are economic risks to this positive scenario; for example, the US Federal Reserve could raise interest rates too quickly, which could cause the economic recovery to slow down and in extreme circumstances, a full-scale recession.
The second theme is more political, but has an economic impact. It is the threat of a full-scale US-China trade war, which could hurt the global economy. This is in no one’s interest and unfortunately appears to be escalating. The US has just listed a further $200 billion worth of products it intends to place 10% tariffs on, as early as September. With the US mid-term elections in November, Donald Trump is expected to pursue his ‘America First’ trade policies and the threat of a full-scale trade war will remain in the background.
Whenever there is a US policy announcement on trade or just a ‘tweet’ by Donald Trump, there will be an impact on markets and, probably, a negative one, at that. The threat of a trade war will increase the volatility in markets, which may create opportunities.
As long as the global economy is moving in the right direction, the negative impact caused by a trade war will be minimal, although we should be concerned. It is only when the economy starts to move in the opposite direction that we should be worried.