The looming trade war between the US and China is threatening a big upheaval in the financial markets. Unless necessary steps are taken to manage the repercussions,intensification of the trade war can trigger an avalanche of events in China and elsewhere.
It can cause major obstruction in the supply chains in various industrial sectors including automobile, technology and those that rely on outsourced industry components. The situation can easily derail growth in an already flailing global economy.
While there is widespread speculation as to who has the upper hand in the Sino-US trade war, China is meeting up with multinational companies setup in China to assess the situation. Surprisingly, markets have been quite immune to the trade tensions prevailing between the two countries.
For instance, the MSCI global equity index has increased by 10 % in the early quarter of 2018. And investors are not worried about the risks involved in the rising corporate debt, which is incidentally more prevalent in the developed countries.
There are other puzzling indicators that look abnormal given the current financial situation. One such instance is thehigher interest rates enforced by the Federal bank. The higher budget deficits and tax cuts have forced the US to sell more of its debt, which seems to have the reverse impact on the yield curve globally. The curve has inverted after a long hiatus of over 10 years.
The change in the European, Japanese and US interest rates has widened the gap, which is a strong indication of dollar prices moving upward as has happened in similar situations previously. Although dollar has strengthened since its February price, the rate is 4 per cent less than its prevailing rate during the beginning of 2018.
Whether it is an overconfident investor mindset or inability to identify the risks involved, the market needs to gear up for any eventuality by identifying major risks, adapting to the changes and managing them effectively.