Expert analysis: What US trade tariffs on China might mean for GCC markets
By Jameel Ahmad, Global Head of Currency Strategy & Market Research at FXTM
Confirmation in the early hours on 6 July that President Trump has imposed tariffs on Chinese imports is likely to encourage trade war fears. These fears are likely to continue dictating the attention of investors throughout the second half of 2018.
While the UAE and GCC region might appear isolated from the trade tensions between these two super economies, the global market sentiment is being dictated by this headline, which can also have an impact on local markets in the region.
Many spectators have taken this news as a clear step towards entering a trade war. The attention of the world has switched to what China might potentially do next after Beijing reacted to the implementation of trade tariffs by accusing the US of starting “the largest trade war in economic history”.
Anticipation over how Beijing will react or retaliate against the decision from President Trump is likely to be the next question on the minds of investors. It is widely speculated that Beijing might be considering selling US treasuries, while others expect authorities to deliberately devalue the Chinese Yuan.
Devaluing the Yuan means?
In the unlikely event that the People’s Bank of China (PBoC) retaliated by deliberately devaluing the Yuan, there would likely be a negative impact on the global market sentiment.
It would likely be followed by a period of market uncertainty, where investors appear reluctant to invest in stock markets.
This would have a knock-on impact on the GCC and local market as a result of investors becoming more reluctant to invest in emerging market assets.
It can’t be ruled out that one of the reasons for the 14% decline in the Dubai Financial Market year-to-date is due to a lack of risk appetite from investors with concerns over what impact a trade war could have on the global economy.
My personal instinct is that the PBoC will not devalue the Yuan because it would risk investors losing confidence in China.
Authorities are also likely to prefer not encouraging a period of market volatility that could negatively impact the markets around them.
The last time the PBoC deliberately devalued the Yuan in 2015, it squashed risk appetite to the point where a wide range of emerging market currencies were punished by the decision.
I feel that China will likely not want to lose “face” and damage credibility at a time where authorities are aware that the world is eager to see how they react to provocative measures from President Trump. I don’t think China will move in the direction of deliberately weakening the Yuan.
What I feel that investors should be doing instead at this time is waiting to see how the financial markets react to the news.
A period of risk aversion in the atmosphere is likely to increase the probability of resuming the cautious atmosphere that the stock markets observed throughout the final period of the second quarter.
The stock markets generally struggled to find any momentum during this time.
An atmosphere of risk aversion would also enhance the chances of seeing further weakness in the emerging market and South East Asian currencies during the second half of the year.
The Chinese Yuan, Indian Rupee, Malaysian Ringgit, Thai Baht, Korean Won and Singapore Dollar all initially traded lower in the hours following President Trump confirming that tariffs on China would be implemented as of 6 July.
Continuation of this form would encourage the probability of further losses for emerging market currencies.
Where investors might find some opportunities is in the Japanese Yen and US Dollar. We have seen on multiple occasions in the past that the Japanese Yen can benefit from market uncertainty, while the Dollar has advanced over 5% in the second quarter of 2018.
A significant proportion of this advance was during the peak of trade war concerns and has been attributed to expectations that markets might adopt the USD more widely in their local market as the world’s reserve currency. Others feel that if a trade war breaks out wider than the United States and China, where the European Union, Mexico, and Canada might also be involved that the United States might be in a better position to withstand the economic headwinds, than the economies it is targeting.
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