In our last note we pointed to the risk that with the market at all-time highs and the strong GDP print,
there is no urgency for the president to quickly conclude the China trade deal. Starting with the May 5th
tweets, prospects for quick trade resolution suffered a setback. Global equity markets have now adjusted
lower to reflect an increased probability of trade breakdown and resulting economic slowdown. Our base
case was, and still is, that the trade war with China will get resolved this year, and we remain
The reason for our stance is the very low positioning across
virtually all types of equity investors, and so far limited technical damage by the recent increase in
volatility. Observing actions of the US administration makes it apparent to us that the tone and
sentiment towards the trade war changes with roughly ~100 points on the S&P 500. The market moving higher
generally leads to a hardened stance and more confrontational tone, and the market moving lower generally
leads to either verbal or actual progress towards trade resolution. In 2017, we introduced the concept
of a ‘Trump put’ which has now evolved into a ‘Trump collar’ (i.e. limited upside due to escalation of
the trade conflict). We think that the Trump put is 3-4% out of the money, and would kick in well before
the ‘Fed put’ (which is likely 10-15% out of the money). We maintain our (probability-weighted) year-end
price target of 3000 for the S&P with an expectation that trade resolution would lead to markets moving
significantly above (e.g. 3200), and a complete trade breakdown would lead to the market finishing
significantly below our price target (e.g. 2550)
To be clear, we are not advocating tariffs as the way forwards. It is just that they create some winners
amongst all the losers, with both the ECB and the UN recently suggesting that the EU, the biggest trading
bloc globally, could benefit from trade diversion. This seems to have been lost amongst all the
negativity surrounding the subject. It is especially important if the ECB has a different read on all
such challenges than many other commentators and market participants, who may be looking at things very
much through the prism of the US.
Indeed, figures released today show, seasonally adjusted,
EU-28 exports of goods to China (worth an annual €215bn) growing by 2.3% in the first quarter, and by
11.1% on year.
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