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Markets have so far shrugged their shoulders over the recent escalation of trade war between the US and China and decided to rally, points out the research team at Deutsche Bank.

Key Quotes

“Over the last 36 hours we have now seen the US announce tariffs on $200bn of Chinese exports to the US – with the potential for more – and China retaliate with the announcement of tariffs in the range of 5-10% on $60bn of US imports.”

“Various theories did the rounds yesterday as to why risk assets have rallied in response to the escalation with the consensus being that it was mostly in line with what was expected.  Also noteworthy was the Chinese government yesterday announcing a boost to infrastructure investment growth. Meanwhile with the US administration also suggesting that the tariff rate won’t be lifted to 25% until next year, there’s perhaps also some hope that negotiations could resume between the two governments and therefore some sort of agreement reached to walk back on the tariffs.”

“In any case the next move is clearly crucial, particularly if the US administration acts upon China’s move by introducing tariffs on the remaining $267bn of Chinese exports to the US.  You also can’t rule out the possibility of China going down the non-tariff route given the limitations on how much tariffs they can apply.”