Countries that are heavily dependent on trade relations with the U.S. rushed to negotiate a new deal. However, China took the challenge and introduced retaliatory tariffs.
As promised, Donald Trump raised China tariffs to 104%. China responded by raising its tariffs on American goods to 84%. Not surprisingly, global markets found themselves under strong pressure as traders focused on the trade war between the world’s biggest economies. Oil is the main victim of the trade war as China and the U.S. are key consumers of energy.
At this point, the situation develops according to the worst-case scenario for global markets. Neither the U.S. nor China are willing to back down, and global recession risks are rising at a robust pace.
In essence, there are just two potential scenarios: China will either agree to a new trade deal with the U.S. or choose to maintain its current policy. It should be noted that time is the key factor.
The real-life practice of trade wars shows that the window of opportunity closes fast in the modern world. Businesses have no time to wait for politicians to agree to any kind of a deal. They must work and find solutions to their problems.
As soon as trade and money flows are restructured, there is no incentive to reach a deal between competitors in the trade war. The economies start operating in a new reality.
If the U.S. and China remain stuck in a trade war, the central banks will be forced to pump liquidity to provide support to the economies. In this scenario, central banks will prioritize economic growth over inflation, which will be bullish for gold and Bitcoin in the long run.
Assets that protect against inflation will be in high demand as de-globalization and economic fragmentation, which are inevitable in case the trade war continues, are inflationary.
Most assets may suffer a pullback if the global economy starts falling into recession as traders will be forced to raise money and sell assets regardless of their fundamental value. Such times provide an opportunity to buy fundamentally sound assets at attractive prices.
In the near term, markets will stay extremely volatile. While recession risks are rising, many traders would like to «buy the dip» in hope that the U.S. and China reach a deal, igniting a strong rally in global markets.
That’s why investors should expect to see periodic dip-buying in the near term regardless of whether the U.S. and China strike a deal or not. If the deal is not reached in the upcoming few weeks, global markets may suffer a sell-off. As noted above, investors should keep in mind that risks of a «no deal» are rising with each subsequent week.