Deciphering the market reaction to U.S.-China trade tensions

Usukhbayar Gankhuyag / Unsplash
Usukhbayar Gankhuyag / Unsplash

The lack of an adverse market reaction to the recent escalation in the U.S.-China trade war took many by surprise. Not us. U.S. President Donald Trump announced he was imposing tariffs on an additional $200 billion worth of Chinese goods, and China retaliated with tariffs on an extra $60 billion worth of U.S. exports. Markets appeared to shrug off the escalation, yet we do not interpret this reaction as a lack of concern. Rather, it reflects that markets were already pricing in much of the bad news, in our view. Our U.S.-China relations BlackRock Global Risk Indicator (BGRI) measures market attention to the geopolitical risk scenario where the U.S. sets tariffs on nearly all Chinese imports, and China retaliates with its own tariffs and adds roadblocks for U.S. business.It tracks the frequency of words that relate to this geopolitical risk in analyst reports, financial news stories and tweets, taking into account positive and negative sentiment in the text. The higher the index score, the more markets are focusing on the risk, and vice versa. Lately, this BGRI has been hovering around three times its long-term average, indicating a very high level of market concern toward U.S.-China relations. See the chart below.

That the U.S. was considering tariffs on an additional $200 billion of Chinese exports had long been in the news, as had China's planned response. Against this backdrop, the actual imposition of the new tariffs was barely news. And to the extent it was, the details surprised on the positive side, as the 10% U.S. tariff rate (with a plan to raise the levy to 25% at the start of 2019) was lower than the 25% at the onset rate some market participants had expected. The U.S.-China relations BGRI is part of our BlackRock geopolitical risk dashboard , an online hub where share individual BGRI scores for each of our top-10 geopolitical risks as well as our analysis on the likelihood of each risk's occurrence over a six-month horizon and its potential market impact. The dashboard also includes a new analytical feature showing to what extent global equity markets may be pricing in each risk as well as our global BGRI for geopolitical risk overall. [storytout] Read more in our BlackRock geopolitical risk dashboard . [/storytout]

Our base case for U.S.-China relations?

U.S.-China relations U.S.-China relations LatAm populism North Korea Global trade tensions risk BGRI Isabelle Mateos y Lago is BlackRock's Chief Multi-Asset Strategist. She is a regular contributor to The Blog .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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