Tariff-Related Selloff: Near-Term Risks and Their Potential Impact
The ongoing trade dispute between the US and China has been a major source of uncertainty for global markets. The recent announcement of new tariffs has led to a selloff in various asset classes. In this blog post, we’ll discuss some near-term risks that could accelerate this trend.
Yen Carry Trade Blow-Up
The yen carry trade is a strategy where investors borrow yen at low interest rates and invest in higher-yielding assets, such as US stocks or bonds. This strategy has been popular in recent years due to the large interest rate differential between Japan and the US. However, if the yen strengthens significantly, this strategy can lead to large losses as investors are forced to repay their yen loans with more yen than they borrowed.
The risk of a yen carry trade blow-up increases when global risk appetite wanes, as we’ve seen in recent weeks. A sudden selloff in risk assets could trigger a wave of yen buying, leading to a stronger yen and potential losses for carry traders.
Rising Credit Risk
The trade dispute has already led to increased uncertainty and volatility, which can make it more difficult for companies to access credit. This is particularly true for companies that are heavily reliant on global trade or have significant exposure to China. If the trade dispute escalates further, we could see a rise in credit risk, which could lead to a selloff in corporate bonds and potentially trigger a wider market downturn.
Collapsing Oil Price
The trade dispute has also led to a collapse in oil prices, which could have far-reaching consequences. Lower oil prices can lead to lower inflation, which can make it more difficult for central banks to raise interest rates. This, in turn, can lead to a weaker dollar and potentially lower long-term bond yields. However, lower oil prices can also lead to lower profits for energy companies, which could lead to a selloff in the energy sector.
Reduction in Gen AI Capex
The trade dispute has also led to uncertainty around the future of Gen AI investment. China is a major player in the Gen AI space, and the trade dispute could lead to a reduction in Chinese investment in this area. This, in turn, could lead to a reduction in global Gen AI capital expenditures, which could have a negative impact on the sector and potentially the broader market.
Recession and Reduction in Earnings Growth
The latest ISM Services data showed a contraction in the services sector, which is a leading indicator of a potential recession. A recession would lead to lower earnings growth, which could lead to a significant selloff in the stock market. Additionally, a recession could lead to a wave of credit defaults, which could further exacerbate the selloff.
Impact on Individuals
For individuals, a tariff-related selloff could lead to lower investment returns and potentially lower job security. If you have investments in the stock market, you could see a significant decline in the value of your portfolio. Additionally, if you work in a sector that is heavily reliant on global trade, you could be at risk of job losses or reduced hours.
Impact on the World
The tariff-related selloff could have far-reaching consequences for the global economy. It could lead to a reduction in trade and potentially a global recession. It could also lead to a wave of currency devaluations and potentially a currency war. Additionally, it could lead to a reduction in global investment, which could have a negative impact on economic growth.
Conclusion
The ongoing trade dispute between the US and China has led to a significant amount of uncertainty and volatility in global markets. The near-term risks we’ve discussed, including the yen carry trade blow-up, rising credit risk, collapsing oil price, and reduction in Gen AI capex, could accelerate the tariff-related selloff. For individuals, this could lead to lower investment returns and potentially job losses. For the world, it could lead to a reduction in trade, a potential global recession, and a wave of currency devaluations. It’s important for investors to stay informed and to have a diversified portfolio to weather these uncertain times.
- Tariff-related selloff could lead to significant losses in the stock market
- Yen carry trade blow-up could lead to large losses for carry traders
- Rising credit risk could lead to a wave of credit defaults
- Collapsing oil price could lead to lower inflation and lower long-term bond yields
- Reduction in Gen AI capex could have a negative impact on the sector and potentially the broader market
- Recession could lead to lower earnings growth and potential job losses
- Currency devaluations could lead to a currency war
- It’s important for investors to stay informed and to have a diversified portfolio
