Market participants have been reluctant to come to terms with the increasingly fraught backdrop for global trade this year, despite ongoing escalations emanating from the Trump administration.
Generally speaking, consensus has been (and continues to be) that Trump is “more bark than bite”, a hypothesis that paradoxically sows the seeds of its own demise to the extent the President is predisposed to overreacting when he believes someone has called his bluff (just ask Steve Mnuchin who saw his “truce” with Chinese Vice Premier Liu scrapped as soon as the protectionist contingent accused the Treasury department of selling out America).
The “more bark than bite” characterization is partially informed by the assumption that Trump is motivated more by a desire to bolster the GOP ahead of the midterms than he is motivated to actually rewrite the rules of global trade.
But with each passing escalation, analysts have begrudgingly come to the conclusion that Trump, for whatever reason, is to a certain extent serious and that realization has led to the ratcheting up of tariff probabilities, Goldman being the latest example.
As BofAML’s David Woo put it earlier this month, “the failure of the US to get a NAFTA deal before the Mexican election and the Canadian retaliatory tariffs went into effect is forcing us to conclude that a market correction may be necessary to reduce the likelihood of a further escalation of trade wars.”
And so, the latest client surveys released by Wall Street’s biggest banks are starting to betray a growing sense of consternation with the trade situation. In the latest installment of their quarterly global macro survey, for instance, Barclays noted that “for the first time in at least four years, more than half of respondents think a disappointment [in global growth] lies ahead.” The proximate cause for the deterioration in the outlook appears to be trade jitters.
Well, in their latest rates and FX survey conducted on 06-11 July and representing the views of 58 fund managers responsible for $286 billion in AUM, BofAML found that 64% of respondents believe trade tensions are set to get “modestly worse” resulting in a drag on global growth.
Still, BofAML notes that stewards of capital are reluctant to accept the idea of a worst case scenario.
“Despite recent escalation, investors are sanguine on the impact of trade tensions, with most investors expecting only a slight or negligible impact on global growth,” they write.
I guess it all depends on your definition of “sanguine”. After all, it was just last year when “synchronous global growth” was the controlling narrative. Now, we’re talking about the opposite.
There are a couple of other notables from the survey, including the following visual which shows that just one third of respondents think the Fed can/will continue hiking considering the worsening trade tensions.
That, BofAML notes, “may explain why the Eurodollar curve has inverted in 2020”.
Finally, consider that nearly half of survey participants now expect the Fed’s balance sheet normalization to conclude in 2019.
You’re encouraged to think about that in the context of Morgan Stanley’s contention that balance sheet unwind will end early, leading to curve inversion next year and ultimately culminating in balance sheet expansion in 2020.