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Weekly Market Focus 16 July 2018

There is some debate about whether the 26% fall since February of the Shanghai Composite index is solely because of the trade dispute with the US. As we know the Asian giant has been rebalancing its economy away from exports to domestic consumption while maintaining some degree of financial market stability since the financial crisis of 2009. As the global economy slowed down and the US central bank started raising rates in 2015, other G20 central bankers informally agreed to stimulate their economies in February 2016 in what was termed as the Shanghai accord. The Chinese central bank raised its open market operations and fiscal incentives were also implemented to boost consumption and a rise in GDP growth and equity indices followed. However higher comparative growth bases made sequential progress harder recently and hence equity indices retraced on this basis.


The effect of a trade war is difficult to analyse as the quantum and timing of the impact and nature for each specific scenario of elasticity of demand and supply on savings and investment rate to GDP, balance of payments, unemployment etc. are so diverse. As the issuer of the global reserve currency and absorber of global savings, the US has to run a capital account surplus whose counterparty is a current account deficit. However  savings and investment imbalances in surplus countries are challenged in a trade war and this should be beneficial to the global economy in the long run.

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