The macro-economics and the macro-environment are (almost) perfectly at odds with each other.
Economically the world is actually pretty solid – the data tells us so.
US GDP is strong, European GDP is growing at post-GFC record, Asia and to an extent Australia are reaching strong forecasts – although they are not shooting the lights out by any means.
Environmentally – the world is caught in a vortex of tit-for-tat, social media, geo-politics trade wars that leaves too much to the imagination and nothing to hard data.
For example: the fluid and opaque nature of the latest release from the White House sums up why markets are reacting so violently to the current conditions.
‘…the United States Trade Representative (USTR) determined that China has repeatedly engaged in practices to unfairly obtain Americas’ intellectual property… On April 3, 2018, the USTR announced approximately US$50 billion in proposed tariffs on imports from China as an initial means….
…Rather than remedy its misconduct, China has chosen to harm our farmers and manufacturers. In light of China’s unfair retaliation, I [the President] have instructed the USTR to consider whether US$100billion of additional tariffs would be appropriate under section 301…’
How can markets price in risk when that statement in itself is so fluid. The use of ‘consider’, ‘proposed’ ‘initial means’ et. al. gives recourse to all manner of pricing.
It has been observed that the President’s language and final actionable policies are considerably different just look at the resent global tariffs on steel and aluminium however:
There is a baseline scenario in the US-China trade war is:
- There will be a tariff(s) enacted under the cause of the section 301
- The size will be at a minimum US$50 billion
- China will respond and will likely enact an amount of equal measure.
- Language is likely to increase before any sign of an actual deal arises.
On the third point, there is an interest point playing out here: the total amount of US export to China is less than the combine amount of US tariffs on Chinese exports to the US (once you include the proposal above).
It begs the question what ‘other’ responses China could put on US goods or its economy? It just adds further discontent and further mispricing in markets it certainly will be interesting to watch.
So, once we factor in the ‘baseline’ one can understand why market pricing has been so erratic – negative impact on economy and an impact on global trade.
Reactions this year give insight to how the rest of the year may appear. In the 70-odd trading day of 2018 the S&P has tripled the total 1% plus moves of all of 2017 and trading on Friday night shows that volatility is likely to settle in the high teens low 20’s going forward as the risk of an event like that described above is no longer a low probability but a moderate one.
The environment macro conditions have structurally changed in the short-term outlook. This highlights the importance of having stops and understanding risk positions, as we are only beginning to see the kind of movements markets will make in 2018.