Market Forecast – Trade War Significant Risk

We maintain the view that this is just the beginning of a trade war between the US and China.  Even if it does not actually happen, the rhetoric will get worst over the coming weeks.  Thus, we strongly recommend that you keep a high cash position and even short the market index or specific stocks as hedge.  On our end, we are keeping a significant position in shorting the market.

In short, I don’t see this being resolved soon for several reasons.  Please see our prior article on the 27th of March, link copied below for your convenience:

Trade War Forecast – 27th March 2018

Currently this is a trade skirmish that has a huge potential to turn into a trade war.  In this war, the US has the upper hand since it has a large trade deficit with China, very low unemployment, stronger banking system etc.   The main reason for this escalation is intellectual property theft and geo-political reasons.  The intellectual property theft in China is widely acknowledged from not just the US, but also Europe and Japan.  Thus, if it becomes worse, I expect China to be the looser on this.

Another factor is that China cannot loose face domestically.  Thus Xi will use control of domestic media to play underdog and invoke nationalist feelings.  This is also the case for Trump to a lessor extent.  This is an important factor in pushing the escalation further.

Finally, Xi is basing his economic and geo-political future on the status-quo in terms of trade practices.  This means it will be more difficult to change or agree.

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