Via Morgan Stanley:
We no longer doubt that the US administration’s proposals signal the direction of trade policy. An escalatory cycle of protectionist actions, not just rhetoric, has begun and will continue. It’s another reason why pressure should continue in risk markets, which now must eat their US policy vegetables after feasting on dessert in 2017.
Our ‘dessert before vegetables’ thesis suggests markets were conditioned for unambiguously accommodative policy outcomes entering 2018. A major, tax-driven fiscal stimulus had been just inked by an administration fond of pointing to the stock market as a scoreboard. Trade policy followed another scoreboard, bilateral deficits, making it possible for markets to envision a path away from the fundamental uncertainties of escalation and toward negotiation. A reduction in the US-China trade deficit could keep tariffs and other measures at bay, de-escalating the conflict without putting the global growth dynamic at risk. Treasury Secretary Steven Mnuchin appeared to signal this outcome on May 20, stating that “We’re putting the trade war on hold” following China’s announcement that it intended to increase purchases of US commodities.
