Investors need to prepare for an extended period of economic warfare, says Deutsche

Investors need to prepare for an extended period of economic warfare, says Deutsche

May 14, 2019

Calm is fast returning to U.S. equity markets after Monday’s mauling – for now at least.

Helping out are comments from President Trump who told reporters he would know in three to four weeks how well a U.S. delegation’s recent trip to China went, but that he thinks they’ll be “very successful.

As equities hang on every word of this ramped-up trade spat, it seems even the hint that things will work out is enough to give stocks a bump. That’s even as some, like, Micheal O’Rourke, chief strategist at JonesTrading, says markets need to stop rewarding false promises. If the White House “continues to mislead markets about progress, markets will turn on it soon enough,” he says.

Onto our call of the day from the chief investment office at DWS Investment Management (a unit of Deutsche Bank), which warns the current trade dustup could be building into “something worse.”

While the chances of the U.S. and China reaching a give-and-take compromise is still a possibility, this window is shutting fast. “Unless a deal can be struck quickly in the coming weeks, markets will need to prepare themselves for an extended period of economic trench warfare. And large listed U.S. companies in particular could well find themselves in the line of fire,” said DWS in a note to clients.

Explaining what they mean by “economic trench warfare,” DWS says that up until now, China’s strategy has been to “wait, strategically inflict pain, delay and hope U.S. pressure eventually goes away.” But with that strategy apparently not working out, Beijing now may be digging in its view that short-term political and economic pain will reap some longer-term gain.

That sort of “aggressive posturing” aimed at getting concessions is often at the core of escalating conflicts such as what we’re seeing between Beijing and Washington, said DWS. “The nature of trade wars (like actual wars) is that they foster nationalist sentiment and jingoism. The first shots are fired in the hope of quick victories. And before you know it, both sides are stuck in the trenches, with no obvious and politically feasible way out.”

And the strategists worry we are getting to that point “rapidly.” They say watch the Trump administration for signs it gets the seriousness of the matter and is making contingency plans in case things don’t work out. Meanwhile, “downside risk to equities for now outweigh the potential upside.”

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