Saxo Bank Warns of Trade War in Q3 Outlook Report

Multi-asset brokerage Saxo Bank has warned that tensions between the United States and China could end “very badly” in its outlook report for the third quarter of 2018.

In fact, the report paints a rather dim scenario for the quarter and states that we are entering into one of the most dangerous periods for the global economy since the Berlin Wall fell in 1989.

In particular, Saxo Bank points to the short-sightedness of the world’s governments escalating trade tensions. This is considering the proximity to the November 6 US midterm elections, where Trump will need to show that he’s getting America “a better deal.”

No stranger to making bold market calls, Steen Jakobsen, Chief Economist and CIO at Saxo Bank said: “global tensions are ratcheting higher by the day, fuelled by the foolish policies of foolish leaders.

“Tit-for-tat trade wars and agendas that pander only to self-interest are jeopardizing the global economy.”

Jakobsen also adds: “There are no winners in a trade war, and the trend is pointing in the wrong direction as nationalist agendas erode the status of global institutional frameworks.

“History teaches us that this can end badly. If the loser is a big economy or a strong political power, they may impose restrictions – tariffs, for example – to counter the competitive disadvantage.”

Can we avoid a trade war?

While the current consensus is that an outright trade war will be avoided, according to Jakobsen, it ignores the midterm election in the US.

Jakobsen suggests there are three possible paths from where we are now:

1. A ‘mild’ crisis where the US, China, and Europe all reach higher tariff levels but stop short of creating outright ‘walls’ – probability: 25 percent.
2. A more severe crisis with escalating trade tensions into the November 6 US mid-term elections and beyond (where President Trump must show his base that he is living up to his promises of ‘getting the US a better deal’) – probability: 50 percent.
3. A move on par with the Smoot-Hawley Tariff Act of June 1930 – probability: 25 percent.

Jakobsen sources a United Nations (UN) report from May, which said a trade war could trigger “a sharp drop in global investment and trade.” In a scenario outlined by the UN, world gross product growth could drop by 1.4 percent in 2019 and slow world trade growth by 6 percent.

To put this in perspective, losses of this size in trade is around half of those experienced in 2009, which was the worst year of the global financial crisis.

Only China can save us

While the report is mainly negative, there is some hope, and that hope is China.

Commenting on China, Christopher Dembik, Head of Macroeconomic Analysis said: “So far, China has only responded to the US measures by using the same tools, and without seeking escalation.”

He also added: “China has still many options to counter the impact of trade tensions. [sic] It is complicated at this stage to second-guess the evolution of US trade policy but it is almost certain that China will do its best to avoid a full-blown trade war and related Volatility Volatility In finance, volatility refers to the amount of change in the rate of a financial instrument, such as commodities, currencies, or stocks, over a given time period. Essentially, volatility describes the nature of an instrument’s fluctuation; a highly volatile security equates to large fluctuations in price, and a low volatile security equates to timid fluctuations in price. Volatility is an important statistical indicator used by financial traders to assist them in developing trading systems. Trad In finance, volatility refers to the amount of change in the rate of a financial instrument, such as commodities, currencies, or stocks, over a given time period. Essentially, volatility describes the nature of an instrument’s fluctuation; a highly volatile security equates to large fluctuations in price, and a low volatile security equates to timid fluctuations in price. Volatility is an important statistical indicator used by financial traders to assist them in developing trading systems. Trad Read this Term because financial and monetary stability are crucial to its future economic development.”

Tough times ahead

The report also addresses the equity and Forex Forex Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Read this Term markets. According to John Hardy, Head of FX Strategy, in the second half of 2018 equity markets will begin to negatively discount 2019. He also adds this is likely to be a year in which the US government will run its largest deficit to nominal GDP since 2013.

Hardy claims: “the market got a bit ahead of itself in positioning for further strength in the euro and weakness in the US dollar in Q2.

"But after the enormous correction and USD rally, we look for the USD to find a top in the second half of the year and to begin heading lower again," he said.

"The world can’t afford a strong dollar and once the Trump tax and fiscal stimulus fade, the US will have a hard time finding USD buyers to offset its enormous external imbalances,” he warned.