markets

Morgan Stanley Says Market’s Still Puzzling Out What Tariffs Are Really About

Market Response to China Tariffs 'Out of Whack,' Golub Says

One big challenge for markets now may be assessing whether the Trump administration’s trade policies are about more than just trade, Morgan Stanley said.

The U.S.’s failure to “fully clarify” the rationale for tariffs on $50 billion of Chinese imports, combined with recent White House staffing shuffles, have increased the level of geopolitical uncertainty that needs to be factored in, Morgan Stanley strategists Hans Redeker and Gek Teng Khoo wrote in a note Friday. In addition to the U.S. tariffs and a $3 billion retaliation by China, President Trump on Thursday replaced U.S. National Security Adviser H.R. McMaster with John Bolton, who’s generally seen as hawkish on foreign policy.

“The U.S. administration has not yet fully clarified that the trade dispute is only about trade,” Redeker and Khoo said. “Using tariffs to reduce trade imbalances may not be ideal, but would unlikely derail the global economy. However, using tariffs and trade policies to influence geopolitical balance may have very different implications for growth, risk markets and FX.”

The strategists said they wouldn’t be surprised to see stocks retest their early-February lows, which may keep cyclical currencies under selling pressure. They see the U.S. dollar/Japanese yen pair possibly testing 104.20, but no reason for universal greenback weakness at this point. And if China brings the yuan into play, which might indicate the country’s willingness to accept bearish global-growth consequences, the U.S. currency could rally sharply.

“The stronger USD would tighten global credit conditions, pushing especially EM into a slower growth trajectory,” the strategists said.

Commodities are “sounding the alarm” as well, they said, pointing out that iron ore futures and copper are well off their recent peaks, “suggesting that demand concerns have turned into a dominant driver in commodity markets.”

One main conclusion: watch China.

“So far, measured response has not provided relief for markets,” the strategists wrote. But China “has no interest in escalating the conflict unless non-economic reasons such as the U.S. potentially strengthening its ties with Taiwan -- which Beijing argues is a violation of the ‘one China’ policy -- were to start to dominate Beijing’s thinking.”

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