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Danske Bank analysts argue  that it U.S. President Trump moves on with the tariff hike, it would cause a “more or less immediate” retaliation from China that is likely to include a similar increase in tariff rates to 25%.

Key quotes

“In addition, China can be expected to put a halt to purchases of agricultural goods as they did last year in response to the US tariffs (they started buying again early this year as part  of the ceasefire). This would be a clear escalation and likely to trigger a further sell-off in equity markets and push bond yields lower. Other risk assets and currencies vulnerable to risk would also be hurt.”

“On the other hand if Trump cancels or postpones the tariff increase it would probably lead to a short-term relief rally in stocks as markets would see it as a bluff and expect a trade deal to still be in reach.”

“Our baseline scenario is still that we have a trade deal by the end of Q2 as we doubt Trump is willing to take the pain from a strong escalation of the trade conflict. But as we wrote on Monday, uncertainty has increased significantly.”