Pugilism is a dumb sport

The most dangerous fights are the ones where both contenders have total confidence they will win. The US-China trade spat is one such example. While President Trump has struck the early blows by implementing hefty trade tariffs, Chinese retaliation will involve more complex moves. Governments and central banks will try to react to support their economies. But their firepower will be insufficient to offset. Equities will be the main loser. We are neutral on the dollar short-term but ultimately US growth prospects will remain superior to the Eurozone and Japan, which makes dollar depreciation against the majors difficult. China will allow the renminbi to weaken. This environment is ultimately deflationary. If China plays the Treasuries card, volatility could spike. But ultimately bonds are still an area that central banks will target.

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