Trade tensions remain a critical tail risk
Trade tensions with China have escalated and continue to be a source of uncertainty for markets. While the implemented tariffs are, thus far, not economically significant (the USD 34 billion implemented on both sides as at 6 July amounts to less than 0.5% of either economy), the risk of escalation remains a looming unknown. If the US administration pursues close to USD 400 billion in tariffs, for example, China could retaliate, and perhaps use strategies beyond tariffs on US imports, which only amounted to USD 130 billion in 2017. While this is certainly a risk, we see the sell-off in Chinese equities, combined with recent statements from the Chinese government around intending to keep its currency stable, as indications that China does not prefer a trade escalation or other retaliatory measures.