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The markets do not seem be overly concerned about the trade war. Partly because they are confident that the Fed will step in if Beijing and Washington end up in an all-out trade war. Do the markets underestimate the effects of the trade war and do they overestimate the Fed’s firepower and willingness?
Debts are at record levels whereas the room for monetary and fiscal stimulus is limited in many countries. Political risks are on the rise across the board. Are we headed for the fifth global recession in six decades with as triggers the US-Chinese trade war, geopolitical clashes, and Brexit?
The trade war is negative for the euro, and the Fed will not hike its rates any time soon in the absence of a considerable decline in share prices. This is why prospects for EUR/USD stay negative.
The outcome of the Brexit process will continue to be unclear for a long period of time. Does this also come down to considerable downward potential for the pound?
Trade worries could support a decline in EMU sovereign spreads, with the German - Italy bond yield spread being a notable exception.
The trade war makes life for the Fed more difficult as it puts a brake on economic growth while pushing up inflation