Heavy bad news already priced in, via Bloomberg
I came across a piece on Bloomberg suggesting that the best way to play the so called 'new cold war' between US and China is to fade the initial market reaction. There is a difference between rhetoric and action. The war of words is just that, words. However, it is the actions that the market will focus on. We saw that recently after the US-Senate bill was passed which potentially meant that some Chinese companies would have to de-list from US-exchanges. That action harmed sentiment in a way that words didn't. After all US president Trump is often engaging in a war of words with many different parties and groups, so it is unsurprising the market is getting tired of moving on them.
Reasons why it makes sense to fade the war on words
- Looking at now vs May 2018 and the start of the trade war major commodities are cheap (oil, soybeans, copper). The USD is up, bond yields are down, and various positive sectors which have moved US markets higher like tech, healthcare, and consumer staples are less sensitive to trade.
- One area that is supposed to be hit by a US-China trade conflict is supply chains. Supply chains are already being hit by COVID-19. If some companies are already moving some of their supply chain back home, how bad would a renewed trade war be?
- Assets most susceptible to disruptions in the supply chain are already deeply discounted. So, prices should only move lower on some extraordinary action by the US or China. Elections are 6 months away, so President Trump seems unlikely to take that kind of risk.
So, if this is the case, fade the moves on any US-China rhetoric/minor action.
If words turn to actions
However, if the war on words turns to more serious actions like China selling US Treasuries or strong action from the US, then buying gold seems to a good initial move.
