When the two biggest economies in the world go head-to-head on trade, no one should be surprised that financial markets don’t like it.

The short week just gone was one of volatile consolidation, after the previous five sessions posted equity-market losses on a scale not seen since the winter of 2016. During the week ending on March 23, the S&P 500 Index plummeted by almost 6 per cent and the export-driven Japanese Topix and German DAX indices were down around 6 per cent and 4 per cent, respectively.

Noisier and more public

As Erik Knutzen noted in last week’s Perspectives, a lot has been going on. Investors sold big-tech stocks as the data-security scandal broke around Facebook. The G20 meeting passed with little more to buttress global trade than a weak statement about recognising “the need for further dialogue and actions.” China wrapped up its National People’s Congress (NPC). The new Fed chairman made his debut with the press. The latest Flash Purchasing Managers’ Indices disappointed. And on Thursday, President Donald Trump set the tone for last week by announcing plans for tariffs on some $60 billion (Dh220 billion) worth of Chinese imports.

I happened to be visiting our offices in China as all this unfolded. My colleague, our Head of China Equities, Bin Yu, was sanguine. As he pointed out, exports have only modestly featured in China’s GDP growth since 2012, contributing just 0.6 percentage points last year. Data from the China International Capital Corporation (CICC) indicate that the direct US revenue exposure of listed Chinese companies is just 5%. Outside of specific areas such as the Apple supply chain, China equities appear likely to suffer little impact, in his view. It is notable that the Shanghai Composite Index has declined less sharply recently than US, European and Japanese equity markets.

It is also possible that what we are seeing now is just a noisier, more public version of the give and take that has always characterised US. — China economic relations. Two important decision-makers for China’s economy, the Harvard-educated Vice Premier Liu He and Vice President Wang Qishan, appear to be taking a pragmatic, globalist approach. Both leaders are well known in the West and quite experienced on the global stage.

Li Keqiang, the current Premier, somewhat anticipated President Trump’s announcement when he said, during the NPC, that “there are no winners in a trade war.” In addition, the People’s Bank of China announced a faster pace to financial reform and liberalisation. By the middle of last week, US officials were toning down the trade-war talk and looking for a deal to avoid tariffs. In the wake of all the media coverage and talk of trade wars, the US and South Korea actually shook hands on changes to their own bilateral trade agreement.

A motivating theme in markets

Even if all this goes to plan, trade tensions are unlikely to ease in the near term. There is no guarantee of Chinese pragmatism. Furthermore, the US and Mexico are in the middle of talks on changes to Nafta. Complicating matters in Mexico is a Presidential election scheduled for July. The leading candidate, with 38 per cent of popular support in the latest poll and ahead by eight percentage points, is Andrés Manuel López Obrador. He is much more sceptical of Nafta than the incumbent, Enrique Peña Nieto, and has threatened to put Donald Trump “in his place” and the “Mexican people first.” With a large part of the electorate apparently undecided, there is a lot of uncertainty south of the US border.

The rising tide of economic nationalism is likely to be a motivating theme in markets for the foreseeable future. There is scope for behind-the-scenes pragmatism while sabres get rattled in public, and that is probably the most likely outcome. But the fact is that when sabres get rattled, blood sometimes gets spilt.

— Joseph V. Amato, President and Chief Investment Officer — Equities, Neuberger Berman