A little over one week into the escalation of the US-China trade wars, stock markets have calmed and even made a partial recovery from last week’s sell-off. Globally, stock markets are now trading around 3.5% below their highs, but that is still only about a third of a correction (a ‘correction’ is defined as a 10% decline). Given how extended stock markets appeared following the extended recovery since the beginning of the year, they could have been described as being in a state where investors start to search for reasons to take profits.
So why is it that stock markets have stabilised even though the rapid turnaround in the trade negotiations, that was initially talked up by the Trump administration, no longer seems plausible? Well, more research has been conducted into the likely short, medium and long term damage potential to the US and global economy, and the conclusion has broadly been that the long term damage potential is frightening, but over the shorter period of the next few months the deterioration of the economic outlook is fairly small. Not dissimilar to the aftermath of the 2016 Brexit referendum, in a way. And just as then, as long as economic sentiment does not sour to create second order effects, the markets may actually not be too far off.
