Trade risks in the spotlight

Mar 12, 2018

Key points

  • We do not see trade risks upsetting solid market fundamentals but would reassess if protectionism escalated and began hurting growth prospects.
  • Global stocks rallied on upbeat U.S. jobs data, shrugging off the limited U.S. steel and aluminum tariffs and the Italian election result.
  • Markets expect a solid U.S. Consumer Price Index (CPI) reading to pave the way for another Federal Reserve rate rise later in the month.

Worries about a slide toward global protectionism are looming over markets. Limited trade actions are unlikely to hurt the risk-on sentiment or shatter the low-volatility market regime, we believe. So far, trade risks have not been a big risk-off catalyst. Yet a potential escalation into trade wars is arguably the most disruptive geopolitical risk to the global expansion and markets in 2018.

Three-day performance of selected assets around trade risk events, 2002-2018

Three-day performance of selected assets around trade risk events

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Thomson Reuters Datastream, as of March 2018.
Notes: The bars show the three-day returns of assets (starting from one trading day before the event) with the most consistent directional movement around six trade-related events since 2002. Assets shown were selected from a pool of 51 we found to have the greatest link to trade tensions. The six events are: U.S. steel tariffs announced in 2002; the first WTO complaint the U.S. filed against China in 2004; U.S. tariffs on Chinese tires and solar panels, both in 2009; Donald Trump’s election as U.S. president in 2016; and U.S. steel and aluminum tariffs in March 2018. Gold is represented by spot gold prices. Yen represents the Japanese currency’s exchange rate against the U.S. dollar. The representative indexes are MSCI EM Index, MSCI ACWI Index, MSCI EM Latin America Energy Index, MSCI China Index, MSCI China Automobiles Index and MSCI China Consumer Durables and Apparel Index.

What kind of impact do trade tensions have on markets? We zoom in on the immediate market reaction around six major trade risk events since 2002 in the chart above, ranging from tariffs on steel to major World Trade Organization showdowns. Gold and yen outperformed, while Chinese stocks, led by consumer durables and automakers, suffered the heaviest losses. We note that the different nature of each trade-related event could trigger different reactions – and that an actual trade war would have a much greater impact on a range of assets.

Words turn into action

The U.S. move to impose steel and aluminum import tariffs has turned U.S. President Donald Trump’s words into action, spurring a debate on global protectionism. It is significant because the challenge to the global trade system emanates from the world’s top economy and erstwhile champion of free trade. The market impact will depend in part on the response of U.S. trading partners. The European Union (EU) has threatened retaliatory measures against a set of iconic U.S. goods. Trump in turn threatened further measures against European carmakers. This previews the risk of tit-for-tat responses down the road. More alarmingly, the EU could apply some of the proposed counter-measures to all of its trading partners, potentially adding fuel to the global protectionist trend.

A major risk would be any direct U.S. action against China. The U.S. has been investigating China’s intellectual property practices. If this leads to targeting of Chinese companies, we expect China to retaliate proportionately. This could escalate U.S.-China tensions in the short term, although we expect China to make serious efforts to avoid a trade war. Over the medium term, we see China addressing its trade deficit with the U.S. by opening up its market to more imports, rather than slowing exports. Another flashpoint is the potential U.S. withdrawal from the North American Free Trade Agreement (NAFTA), should attempts to renegotiate the pact fail. We believe a withdrawal is unlikely, but if it were to happen we could see Mexican and Canadian currencies plunging and global risk assets selling off.

For now, we see limited trade actions as unlikely to affect sound market fundamentals, with any volatility spikes around protectionist measures likely to be short-lived. The robust global growth environment supports the low-volatility regime and risk assets. We would reassess our view should the rise of protectionism start to harm global growth prospects. In such a case, we believe emerging market currencies and equities would be hit hardest, triggering a global flight to perceived safe havens such as government bonds and the yen. Over time, trade frictions could disrupt global supply chains and raise the cost of imports, leading to inflationary pressures. This could increase the pace of the Federal Reserve’s monetary policy tightening.


March 13 U.S. Consumer Price Index (CPI)
March 14 U.S. retail sales; Organization of the Petroleum Exporting Countries (OPEC) monthly oil report; China retail sales, industrial production (IP); eurozone IP
March 15 International Energy Agency oil market report
March 16 U.S. IP

Markets expect a solid U.S. Consumer Price Index reading – a key data point ahead of the Federal Open Market Committee (FOMC) meeting later in March. We expect the Fed to raise interest rates by another quarter percentage point  at the meeting, and will watch for any changes to the “dot plot” – which indicates the appropriate future path for interest rates as seen by individual FOMC members.

  • Global stocks rose, led by small caps, as the U.S. reported the biggest monthly increase in jobs growth since July 2016. Only modest growth in wages eased concerns over runaway inflation.
  • The scope of the decision on U.S. steel and aluminum tariffs was limited, with potential for exemptions. Gary Cohn, Trump’s chief economic advisor, resigned on disagreement over the tariffs. The Trans-Pacific Partnership trade agreement became effective. European markets shrugged off an Italian election that resulted in a hung parliament.
  • The European Central Bank dropped a pledge to expand its bond purchase program if needed. Bank of Japan Governor Haruhiko Kuroda reiterated that the central bank was ready to expand stimulus if needed, quashing speculation around a potential exit from its easing stance. Bank of Canada left rates unchanged, citing trade risks.

Global snapshot

Weekly and 12-month performance of selected assets


EquitiesWeekYTD12 MonthsDiv. Yield
U.S. Large Caps 3.6% 4.2% 17.8% 1.9%
U.S. Small Caps 4.2% 4.2% 19.0% 1.1%
Non-U.S. World 1.9% 0.6% 22.3% 3.2%
Non-U.S. Developed 1.9% -0.1% 19.9% 3.3%
Japan -1.0% -0.4% 19.4% 2.1%
Emerging 2.2% 4.4% 33.7% 2.7%
Asia ex-Japan 1.8% 3.0% 34.0% 2.5%
BondsWeekYTD12 MonthsYield
U.S. Treasuries -0.1% -2.1% 0.7% 2.9%
U.S. TIPS -0.2% -1.8% 1.5% 2.9%
U.S. Investment Grade -0.2% -3.0% 3.5% 3.8%
U.S. High Yield 0.3% -0.4% 5.2% 6.1%
U.S. Municipals -0.1% -1.5% 3.4% 2.7%
Non-U.S. Developed -0.3% 2.7% 13.6% 0.9%
Emerging Market $ Bonds 0.1% -2.1% 5.6% 5.7%
CommoditiesWeekYTD12 MonthsLevel
Brent Crude Oil 1.7% -2.1% 25.5% $65.49
Gold 0.1% 1.6% 10.2% $1,324
Copper 0.9% -3.9% 22.4% $6,962
CurrenciesWeekYTD12 MonthsLevel
Euro/USD -0.1% 2.5% 16.4% 1.23
USD/Yen 1.0% -5.2% -7.1% 106.82
Pound/USD 0.3% 2.5% 13.9% 1.39

Source: Bloomberg. As of March. 9, 2018.
Notes: Weekly data through Friday. Equity and bond performance are measured in total index returns in U.S. dollars. U.S. large caps are represented by the S&P 500 Index; U.S. small caps are represented by the Russell 2000 Index; Non-U.S. world equity by the MSCI ACWI ex U.S.; non-U.S. developed equity by the MSCI EAFE Index; Japan, Emerging and Asia ex-Japan by their respective MSCI Indexes; U.S. Treasuries by the Bloomberg Barclays U.S. Treasury Index; U.S. TIPS by the U.S. Treasury Inflation Notes Total Return Index; U.S. investment grade by the Bloomberg Barclays U.S. Corporate Index; U.S. high yield by the Bloomberg Barclays U.S. Corporate High Yield 2% Issuer Capped Index; U.S. municipals by the Bloomberg Barclays Municipal Bond Index; non-U.S. developed bonds by the Bloomberg Barclays Global Aggregate ex USD; and emerging market $ bonds by the JP Morgan EMBI Global Diversified Index. Brent crude oil prices are in U.S. dollars per barrel, gold prices are in U.S. dollar per troy ounce and copper prices are in U.S. dollar per metric ton. The Euro/USD level is represented by U.S. dollar per euro, USD/JPY by yen per U.S. dollar and Pound/USD by U.S. dollar per pound. Index performance is shown for illustrative purposes only. It is not possible to invest directly in an index. Past performance is not indicative of future results.

Asset class views

Views from a U.S. dollar perspective over a three-month horizon

Table: Asset class views from a U.S. dollar perspective

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Richard Turnill
Global Chief Investment Strategist
Richard Turnill, Managing Director, is Global Chief Investment Strategist for BlackRock, leading the Investment Strategy Function within the BlackRock ...
Isabelle Mateos y Lago
Global Macro Strategist, BlackRock Investment Institute
Isabelle Mateos y Lago, Managing Director, is a global macro investment strategist in the Investment Strategy team of the BlackRock Investment Institute. The ...
Kate Moore
Chief Equity Strategist, Americas
Kate Moore, Managing Director, is Chief Equity Strategist – Americas for BlackRock and is a member of the BlackRock Investment Institute. She is responsible for ...
Jeffrey Rosenberg
Chief Fixed Income Strategist
Jeffrey Rosenberg, Managing Director, is BlackRock's Chief Investment Strategist for Fixed Income. His responsibilities include working closely with the Chief ...