JPMorgan Sees Full-Blown US-China Trade War In “New Baseline”; Could “End US Stock Market Rally”

With US traders still blissfully ignoring the consequences of escalating trade war between the US and China, which has yet to make any material dent on either the US economy or S&P 500 corporate profits, prominent sellside banks have increasingly taken to issuing louder warnings about how they see said conflict progressing. Late last week, JPMorgan became the latest to drastically revise it outlook, and in a note from strategist John Normand writes that the bank has “adopted a new baseline that assumes a US-China endgame involving 25% US tariffs on all Chinese goods in 2019.”

As a reminder of how methodically the US has been advancing a campaign some consider “random and capricious”, Normand summarizes the current state of affairs, noting that Phase I involved tariffs on $50 billion of Chinese imports in July and August; Phase II levied 10% tariffs on $200 billion of imports in late September that rise to 25% in January; and Phase III is the threat to impose 25% taxes on another $267 billion of imports at some stage.

It is now JPM’s baseline view that the US and China will not resolve their differences this year and that the Administration will make good on its threats to escalate.

As a result of this full-blown trade war escalation, JPM has revised its China-related forecasts, expecting only a modest hit to Chinese growth – thanks to offsetting fiscal and monetary stimulus – however it now sees a far steeper devaluation in the Chinese Yuan relative to Wall Street consensus, one which will impact the rest of the EM space; finally the trade war is still expected to have only a negligible impact on the US economy, resulting in a 0.2% decline in GDP and 0.3% in core inflation. To wit: