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Trade War Uncertainty Drags On

By November 13, 2019 news

The trading world waits with baited breath for China and the US to settle their differences and put an end to the volatile situation.

But meanwhile, the trade war uncertainty drags on despite an initial phase one agreement between the world’s two largest economies.

What is the cost of trade war uncertainty?

 Trade war uncertainty index

Realising the high cost of a trade war, the International Monetary Fund (IMF) launched its Uncertainty Index earlier this year. 

Based on historical records going back to 1996 for 143 countries, the new index tracks how many times the word ‘uncertainty’ is used together with the words ‘trade’ and ‘protectionism’ in news and other reports. 

Starting in the fourth quarter of 2018, trade relations uncertainty started climbing and has reached high levels. The cost is significant because productivity and economic output has declined. 

In other words, uncertainty and trade output are inversely or negatively correlated. The more uncertainty there is in the global markets, the less productivity there is.

This means that companies and individual investors are more cautious of spending money because of higher risks. 

Not every asset class is negatively affected, however. Take Gold, for example.

Trade war Gold price

How does the trade war affect the Gold price? 

Unlike many other asset classes like Stocks, physical Gold and the financial instruments linked to the precious metal actually gain from uncertainty. 

The Gold price and uncertainty are positively correlated in the current bout of trade and currency wars between the US and China. The higher the uncertainty, the higher the Gold price goes. The lesson, it appears, is that in a trade war, buy Gold. 

Gold prices blasted through several psychological resistance levels such as $1300, $1400 and $1500 per ounce before calming down on the news that the US and China had agreed on an initial deal in October. 

Other asset classes don’t fare so well. Crude Oil is on a slippery slope because as we mentioned before, productivity and factory output is much lower during a trade war. 

Trade war Oil demand

When manufacturing activity declines, so does demand for crude Oil. 

OPEC and other organisations cut their expectations for global Oil demand several times this year because the trade war is strangling demand for the commodity. 

It appears that an Oil glut is around each corner. 

The risk of an Oil glut is doubled if you consider that the US and China have lost tens of billions of US Dollars in exports and imports because of the trade war. In the first nine months of 2019, US imports from China fell by 53 billion USD and US exports to China fell by 14.5 billion USD, according to a Dow Jones survey. 

A reasonable conclusion to this point is that a trade war and crude oil are inversely correlated because of the reduced output and demand factors. 

Last but not least, how does the trade war affect the Dollar?

Impact of trade war on USD

The USD appears to have taken on the role of a safe haven in amongst all the instability brought to the markets by trade tensions. It remains strong against its peers and at the time of writing its strength is supported by stable US economic growth. 

That’s not to say that the USD has super strength. If the US economy shows any further signs of declining because of trade war, the country’s currency may take a beating. 

After all, the definition of uncertainty is that we don’t know exactly what’s going to happen next.