The lack of an adverse market reaction to the recent escalation in the U.S.-China trade war took many by surprise. Not us.
U.S. President Donald Trump announced he was imposing tariffs on an additional $200 billion worth of Chinese goods, and China retaliated with tariffs on an extra $60 billion worth of U.S. exports. Markets appeared to shrug off the escalation, yet we do not interpret this reaction as a lack of concern. Rather, it reflects that markets were already pricing in much of the bad news, in our view.
Our U.S.-China relations BlackRock Global Risk Indicator (BGRI) measures market attention to the geopolitical risk scenario where the U.S. sets tariffs on nearly all Chinese imports, and China retaliates with its own tariffs and adds roadblocks for U.S. business.It tracks the frequency of words that relate to this geopolitical risk in analyst reports, financial news stories and tweets, taking into account positive and negative sentiment in the text. The higher the index score, the more markets are focusing on the risk, and vice versa. Lately, this BGRI has been hovering around three times its long-term average, indicating a very high level of market concern toward U.S.-China relations. See the chart below.
That the U.S. was considering tariffs on an additional $200 billion of Chinese exports had long been in the news, as had China’s planned response. Against this backdrop, the actual imposition of the new tariffs was barely news. And to the extent it was, the details surprised on the positive side, as the 10% U.S. tariff rate (with a plan to raise the levy to 25% at the start of 2019) was lower than the 25% at the onset rate some market participants had expected.
The U.S.-China relations BGRI is part of our BlackRock geopolitical risk dashboard, an online hub where share individual BGRI scores for each of our top-10 geopolitical risks as well as our analysis on the likelihood of each risk’s occurrence over a six-month horizon and its potential market impact. The dashboard also includes a new analytical feature showing to what extent global equity markets may be pricing in each risk as well as our global BGRI for geopolitical risk overall.
Our base case for U.S.-China relations?
We see an extended period of economic tensions, and view rivalry in the tech sector and disputes over market access as fundamental points of contention. Such escalating frictions threaten to weigh on business confidence and economic growth.
In our latest BGRI update, we have raised the likelihood of our U.S.-China relations risk on trade frictions. We currently see U.S.-China relations and LatAm populism as the risk scenarios most likely to come to fruition. LatAm populism is the risk that voters support populist agendas, reversing a trend toward pro-business, technocratic Latin American governments and scaring off foreign investors. We have raised our LatAm populism risk on a likely hard-right or hard-left-wing victory in the October Brazilian election and a less market-friendly turn by President-elect AMLO in Mexico. We have also raised North Korea risk on renewed tensions.
By contrast, we have nudged down our Global trade tensions risk due to reduced tensions between the U.S. and its traditional allies. U.S. tariffs on auto imports from traditional allies have been avoided for the time being, and we see an uneasy peace for now between the U.S. and Europe as well as good prospects for a revamped NAFTA being agreed to.
Despite geopolitical risks still clouding the landscape, our overall global BGRI has declined to its historical average since our last update in July. This suggests the market’s concern about geopolitical risks overall has edged down.
For the most part, we think this is appropriate. But in a couple of cases we see a disconnect between the market’s declining attention and the unchanged or increased probability of a risk becoming reality, such as in Europe or LatAm.