FW: CIMB Market Musings - How Much Do Trade Tensions Matter?

 

 

RATIONALE SUMMARY

• The short term FX and Fixed Income market reactions to the US-China trade spat has been well-received, and market reaction has been contained. In fact, post event reactions have been rather sanguine, with positive momentum for Malaysia, Thailand and Singapore.
• We are skeptical that trade tensions will escalate to a full blown trade war. This would be a negative sum game and furthermore, China has bargaining chips through both financial market and geopolitical channels. China's role and further negotiations will likely attenuate the actual outcome vis-à-vis Trump's initial rhetoric.
• Over the longer term, a worry is the impact of a larger US deficit which could push up UST yields, although a convoluting factor is the role of risk aversion if this happens which could benefit bonds; currently, UST yields are declining. Furthermore, additional consideration must be given to the stage of the financial market cycle within which negative policies from trade spats take effect.
• We estimate the reaction of government bond yields and FX in MIST markets will likely be negligible. Even if we strip out risk aversion favouring higher rated sovereign bonds in general, yields in MIST are estimated to react by up to 20bps for the bond markets with a negligible effect on FX markets in MIST. Comparatively, Malaysia and Thailand appear less exposed than Indonesia and Singapore through both the financial markets and tradeable goods sector respectively.
• In fact, a trade war (if it evolves beyond spats) could very well reduce the fundamental investment proposition of US assets relative to Asian assets as US GDP growth is negatively affected with additional proof of a US government in disarray.

Best Regards,

CIMB Treasury & Markets Research-Fixed Income
Tel: +603 2261 8557 | Fax: +603 2261 8705
www.cimb.com
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