Special Report Bernstein Bank

 

09.05.2019 – Special report. The clock is ticking, the nerves in global trade are shattered: a final deal in the customs dispute must be made by Friday. Otherwise US President Donald Trump wants to impose new special duties on Chinese goods. The stock markets are trembling, everything is feverishly looking forward to the deadline. But what will happen? We shed light on the possible scenarios.

12 o’clock noon

Hollywood could not have staged the final shootout in a Western movie more beautifully: According to the financial portal “Marketwatch”, a final deal must be made in the customs dispute between China and the USA by Friday noon, 12:00 US East Coast Time. Otherwise Washington wants to impose new punitive tariffs on Chinese imports. What will happen next? On the one hand, the Bernstein Bank does not issue any investment recommendations on principle. On the other hand, we naturally don’t leave our customers out in the rain in turbulent times. We have therefore found an interesting analysis in the financial market for you on the possible scenarios and any resulting consequences.

Standard Chartered sees four possibilities

The British Standard Chartered Bank has made a very competent statement. Steve Englander, the head of foreign exchange trading for the G-10 countries, has listed four options for Friday plus the associated consequences in the customs dispute. So here is the essence of his paper.

1 – The magic rabbit – 25 percent

Option 1): Both sides pull a rabbit out of the hat in a magic trick – probability: 25 percent. The current threats could only be part of the choreography. Maybe China could play “trumping trum” shortly before the end of the ultimatum and throw the trump card on the table, one could always keep the deal from last week. The US administration could also claim this as a victory for itself. According to Standard Chartered, the stock markets would probably rise to new heights in this case. In the G-10 currency market, AUDJPY or AUDCHF would probably be the biggest winners. The USD would probably depreciate against most Asian currencies.

2 – New shift – 50 percent

The most likely option: 2) a new postponement for the introduction of special tariffs because of the “progress made” – 50 percent. This step would probably be neutral to slightly positive for the asset markets, although it looks as if the US has blinked in the duel with China and is satisfied with less than demanded. As in scenario 1, the dollar would probably weaken.

3 – Partial tariff increase – 10 percent

Probability number 3), according to Standard Chartered, would be the limited increase of some penalty duties. For example, the tariffs for goods that are already occupied with 10 percent could rise to 15 percent. Probability of occurrence: 10 percent. This version would be neutral to slightly negative for the financial markets. Because the introduction of penalty duties in the middle of the talks would be an invitation for the other side to leave the negotiating table. Investors would interpret such a step as crossing an important border and immediately speculate about countermeasures. Rather neutral would be limited tariff increases, which would only take effect in a few weeks’ time if there was no progress in the negotiations.

4 – Negotiations burst – 15 percent

According to Standard Chartered, the most risky outcome of the matter, although the probability of a complete increase in special tariffs and the termination of negotiations is only 15 percent. The question is whose economy and financial markets are stronger and who can withstand the pain better. The author suspects, however, that for both sides a bad deal is better than a “good” trade war. However, in this scenario, the JPY would be the big winner. The rest of Asia and highly risk-correlated currencies are likely to take a blow that surpasses anything they have taken so far. The second big trade would be the getaway into US bonds.

Fundamentally, there is much to suggest that the two economic giants will come to some kind of agreement after all. Of course with a deal that can be sold politically as a success. Both Beijing and Washington will not endanger the prosperity of the middle class and the domestic economy. But the devil is in the details. Ultimately, nothing can be ruled out when the mega-egos collide. So keep a constant eye on your trading platform – everything is possible and the opposite of everything.

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