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ECB: European equities would suffer more in a global trade conflict
EU equities would suffer more than their American rivals in case of a full-fledged global trade clash. However, emerging markets would most likely take a bigger hit. That’s what follows from the research uncovered by the European Central Bank on Tuesday.
This year, trade tensions have strengthened because America slapped a bunch of protectionist measures, mostly duties on China, thus increasing the risk of an escalation, which could drive an already notable deceleration in global trade.
American equities would dive by nearly 10% and American corporate bond spreads would head north by 100 basis points in the first year, as the ECB pointed out, illustrating that scenario as 25% import levies slapped by all countries on each other.
The ECB added that in the euro area, stock prices would dive by nearly 15%, while corporate bond spreads would inch up by up to 150 basis point in the first year.
However, emerging markets would dive over 20% in share prices.
European equities have edged down nearly as much as their American rivals after the announcement of a bunch of protectionist measures, as follows from the research. If the tensions worsened, although remained restricted, those symmetrical price dives would probably resume.
Earlier this year, equities sank by 7% on both sides of the Atlantic around major announcements of protectionist measures, and the dink accounted for 12% for companies specifically hit by the announcements.
The symmetric reaction between America and the euro zone actually suggests that financial markets consider lifts in levies to be a lose-lose situation for all sides, as follows from the research.
The explanation for this is probably the anticipated retaliation along with second-round effects, mostly interpreted as a lose-lose situation for the world’s economy, as the research states.
The overall market sentiment is risk-on. The S&P 500 index (US 500) is getting close to the all-time high. Oil is recovering quickly from its recent losses.
What will happen? The FOMC statement will be published at 21:00 MT (GMT+3) on Wednesday, July 28…
PMI reports from the EU, the UK, and the USA will be released during the day!