Fade the US-China rhetoric? 

A recent piece on Bloomberg suggests an approach to play the so-called ‘new cold war’ between the US and China. The suggestion was to fade the initial market reaction. There is a key difference between rhetoric and action however, so the approach was to fade the rhetoric but buy gold on the action. This is because the war of words is just that, words. However, it is the actual actions that the market will react to. We have seen that dynamic play out recently after the US-Senate bill was passed. This bill means that some Chinese companies could have to de-list from US-exchanges. That action harmed sentiment in a way that words didn’t. After all, we all know now that US President Trump is often engaging in a war of words with many different individuals, groups, companies, and countries. As a result, it is unsurprising the market is getting tired of moving on them.

Fading the war of words

One argument for fading the war of words is that much bad news is already priced in.

  • Looking at now vs the start of the trade war (May 2018) the major commodities are cheap (oil, soybeans, copper). The USD is up, bond yields are down, and various positive sectors that have moved US markets higher like tech, healthcare, and consumer staples are less sensitive to trade frictions, so there is less impact from further tensions.
  • One area that is supposed to be hit by a US-China trade conflict is supply chains. We heard a lot about that at the end of 2019. However, supply chains are already being hit by COVID-19. So, if some companies are already moving some of their supply chains back home, how bad would a renewed trade war be? The impact could be limited.
  • Some 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 buy gold

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 be a good initial move.