Markets are on a knife-edge. US President Trumps imposing new trade sanctions against China has meaningfully increased the probability of a trade war. China is unlikely to site idly buy this time around. While at the EU summit, which is expected to discuss the US steel and aluminum tariffs. Asia markets were lower across the board while safe haven CHF and JPY were the only real gainers in FX. Yet, picking trend in FX remains complicated and markets tries to pick winners and losers from an extended protectionism. Countries with significant export exposure to the US such as MXN have declined yet, counties with solid domestic and lower reliance on exports such as India remains supportive.
Surprisingly in this corned generally beta sensitive ZAR has also improved (marginally helped by gold trade). There still expectations for a favorable outcome with limited escalations based on negotiations and in our view Trump his using issue for political gain rather than actual trade repositioning. This action gives Trump a nice bullet point for stump speeches on the 2020 campaign trail. But he gains little from sparking a full-blown trade war. In addition, countries still taking grievances to WTO indicated trade remain within a management framework. Despite the intensifying hype we see this as an opportunity to reload in EM long positions. ZAR, INR, PLN and MXN all look interesting for varied reasons.
By Peter Rosenstreich
