Trade war risk fades, for now

abr 17, 2017 / por Richard Turnill

Key points

  • We see a lower risk of trade wars in the near term. The U.S. did not name China a currency manipulator.
  • Geopolitical uncertainties boosted safe-haven assets. Global bond fund inflows now exceed equity inflows year to date.
  • We see the first round of the French presidential election potentially causing considerable market volatility.

We see a reduced near-term risk of trade wars, as President Donald Trump’s White House appears to have softened its stance toward both the North American Free Trade Agreement (NAFTA) and China. This could benefit emerging markets (EMs).

Emerging market equities and the Mexican peso, 2016-2017

Emerging market equitie and the Mexican peso, 2016-2017

Sources: BlackRock Investment Institute, MSCI and Consensus Economics, April 2017.
Notes: Emerging market (EM) equities' relative performance is calculated by dividing the MSCI Emerging Markets Index by the MSCI World Index. The Mexican peso exchange rate is against the U.S. dollar. Both series are rebased to 100 at the start of October 2016.

Some of the EM assets being dumped as part of the “Trump trade” have made a comeback. The Mexican peso - poster child for that trade - has made a round trip, returning to levels seen before the election. EM equities’ performance against developed market peers has been on the mend, as shown on the chart above.

Second thoughts on free trade

Trump‘s victory sent tremors across EMs as the risk of trade wars spooked investors. But the threat looks to have receded, especially after the Treasury Department did not name China a currency manipulator in its first foreign exchange policy review under the Trump administration.

There are other signs that the initial hostility is dissipating. The administration’s recent letter to Congress on renegotiating NAFTA pointed to a mild stance. Also, Trump’s April meetings with Chinese President Xi Jinping appear constructive, buying both sides time to address a large bilateral trade imbalance. In a show of cooperation, China has proactively offered some trade concessions.

We do see longer-term risks as the U.S. is likely to revisit some trade policies from the 1980s and pivot toward a transactional approach to trade. Geopolitical uncertainties are another concern. But in the short term, a lower chance of trade wars is good news for EMs that are benefiting from global reflation and solid domestic demand. Trump’s recent comments that the U.S. dollar is “too strong” and signs of a preference for a low-interest rate policy are also supportive. We see a declining EM risk premium as the market focuses on fundamentals, underpinning our overweight in EM equities. EM Asia equities stand out as a potential major beneficiary, in our view.


  Date: vertical line Event
April 17 China first-quarter gross domestic product (GDP)
April 17-21 U.S. large-cap company earnings

The French are set to vote in the first round of the presidential election on April 23. The tighter overall race means we expect the first round to be a greater source of market volatility. An anti-establishment surprise could pose the biggest existential threat yet to the euro and the European Union.

  • Geopolitical tensions lifted safe-haven assets. The yen hit a five-month high versus the U.S. dollar. Year-to-date global bond fund inflows now exceed equity fund inflows, EPFR Global data show.
  • The French presidential race became a tighter, four-way race. Uncertainty on who will enter the final round hurt the euro and sent 10-year French bond yield to a six-week high versus its German peer.
  • Several U.S. banks posted solid earnings for the first quarter. Management guidance was positive and we expect additional upside to earnings from regulatory and tax reform.

Global snapshot

Weekly and 12-month performance of selected assets


EquitiesWeekYTD12 MonthsDiv. Yield
U.S. Large Caps -1.1% 4.0% 11.8% 2.1%
U.S. Small Caps -1.4% -0.5% 20.8% 1.3%
Non-U.S. World 0.1% 7.5% 11.5% 3.1%
Non-U.S. Developed 0.0% 6.6% 9.8% 3.3%
Japan -0.2% 3.5% 11.4% 2.3%
Emerging 0.2% 12.0% 16.7% 2.7%
Asia ex-Japan 0.1% 14.0% 17.4% 2.6%


BondsWeekYTD12 MonthsYield
U.S. Treasuries 0.8% 1.6% -0.7% 2.2%
U.S. TIPS 0.8% 2.1% 2.7% 2.2%
U.S. Investment Grade 0.9% 2.4% 3.8% 3.2%
U.S. High Yield 0.0% 3.1% 14.8% 5.8%
U.S. Municipals 0.4% 2.4% 0.4% 2.3%
Non-U.S. Developed 0.9% 3.4% -3.7% 0.7%
Emerging Market $ Bonds 0.4% 4.7% 8.6% 5.4%


CommoditiesWeekYTD12 MonthsLevel
Brent Crude Oil 1.2% -1.6% 26.5% $55.89
Gold 2.7% 12.2% 3.7% $1,288
Copper -2.4% 2.8% 17.8% $5,692
CurrenciesWeekYTD12 MonthsLevel
Euro/USD 0.2% 0.9% -5.9% 1.06
USD/Yen -1.8% -6.7% -0.2% 109.09
Pound/USD 1.1% 1.3% -12.0% 1.25

Source: Bloomberg. As of April 13, 2017.
Notes: Weekly data through Thursday. 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


Richard Turnill
Global Chief Investment Strategist, BlackRock Investment Institute
Richard Turnill is Global Chief Investment Strategist for BlackRock. He was previously Chief Investment Strategist for BlackRock’s Fixed Income and active ...
Isabelle Mateos y Lago
Chief Multi-Asset Strategist
Kate Moore
Chief Equity Strategist
Jeffrey Rosenberg
Chief Fixed Income Strategist