The trade war between China and the US took an unexpected and downward turn at the weekend as US president Donald Trump caught the markets off guard by announcing he would hike tariffs this Friday from the current level of 10% to 25% on Chinese imports worth USD 200bn. Moreover, Trump threatened to target a further USD 325bn of goods (the remainder of Chinese imports into the US) with the same tariff rate, as he is not satisfied with the pace of progress in negotiations with China over the trade conflict.

The news sent Asian markets into a tailspin, with the Chinese market down 5.6% in Monday’s trading. The announcement is also having negative repercussions in western markets – and the turbulence will probably continue in the coming days. However, we should remember that the markets have risen handsomely this year and that price falls could be exaggerated by abnormally high profit-taking.

What will China do now?

Looking ahead, the big question is how the Chinese will react to Trump’s announcement. An agreement certainly looks less certain in the very near term, as China has so far been decidedly unwilling to negotiate ‘with a gun to its head’. Nevertheless, we still expect the two adversaries will reach an agreement in the course of Q2, though the degree of uncertainty with regard to how and when has increased.

While these latest events are negative for equity markets in the short term, we are maintaining our overweight in equities versus bonds for now, as we still expect equities to outperform bonds in the next 12 months.

Stimulation and positive notes

China will continue to stimulate its economy until an agreement is reached in order to counter any negative effects of the trade dispute, and their actions appear to be working. In Europe and the US meanwhile, interest rates should remain low and thus support equity markets. Moreover, both earnings expectations and economic data in the US, Europe and China are generally stabilising and/or picking up, which will be an important driver for equity prices to continue to climb steadily in the coming 12 months.

That being said, uncertainty will be higher than we have grown accustomed to lately – and uncertainty is never good for investors.

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Disclaimer: Danske Bank has prepared this material for information purposes only, and it does not constitute investment advice. Always speak to an advisor if you are considering making an investment based on this material to establish whether a particular investment suits your investment profile, including your risk appetite, investment horizon and ability to absorb a loss.