|DEEPDIVE14/05/20191DEEPDIVE|GLOBAL14May2019TradetroubleKEYMESSAGESThechancesofanimminentUS–Chinatradedealhavereducedconsiderably,inourview.Ourbasecasewithaprobabilityof50%isnowthattalkswillcontinuebutthatthecurrentstand-offwillpersistuntilatleasttheendofthisyear.HighertariffsandpersistentuncertaintylooksettotakeanadditionaltollonChina’seconomy,pushupUSinflationandweighontradeandmanufacturingglobally.Japanandtheeurozonewillbeamongthemainlosers,inourview,andBrazilapotentialbeneficiaryoftradediversion,atleastinitially.Weattributeaprobabilityof30%toabreakthrough,possiblyinthesummer.Butevenifthereisadeal,wewouldnotexpectittoresolvemorefundamentaltensionsbetweentheUSandChina,leavingscopeforpersistentfriction.Inourview,thereisa20%probabilityoffurtherescalationinUS–Chinatensions.PleaserefertoimportantinformationandMARdisclosuresattheendofthisreportMARKETECONOMICS|COMMODITIES|G10FX|EQUITY&DERIVATIVES|G10INTERESTRATES|EMSTRATEGY|EMECONOMICS|CREDITMARKETVIEWSOurexpectationsontradeposearisktoour‘longcarry,shortvol’theme.Considerunwindingthisposition.Rates:InEuropeweseeroomforabullflatteningiftheECBunder-deliversonstimulus.IntheUS,anescalationofthetradedisputecouldraiseratecutexpectations,whileanimprovementwouldlikelylowertheflight-to-qualitypremium.Credit*:Anescalationoftensionscouldbeverybearish,withunderperformanceparticularlystarkinCyclicals,trade-sensitiveissuersandEuropeanvs.USCredit.Equities:Considertakingriskoffthetableoratleasthedgingequityexposure.FX:TradetensionsnotasbearishEURUSDasin2018,considershortUSDJPY.AsiaFXislikelytodepreciate,inourview,ledbytherenminbi.EM:Iftensionsincreaseweexpectcommodity-drivencurrenciestounderperform.WelikelongCE3currenciesagainsttheUSDandshortAsiancurrencies.WealsofavourreceivinglocalcurrencyratesinBrazil,ChinaandMexico.ContentsNoimminentbreakthroughinsight……………..……2Scenarioanalysis…………………………….…..……...3Economicimplicationsfordevelopedmarkets………..4Implicationsforemergingmarkets………………...….6Marketimpl...
