JP Morgan Has Downgraded China Stocks as it Predicts ‘Full-Blown War’ with the US
Last updated on December 3rd, 2018
In context to the ongoing US-China trade war, JP Morgan announced that “it has adopted a new baseline that assumes a US-China end-game involving 25% US tariffs on all Chinese goods in 2019” since it has become apparent that the two giants won’t resolve their differences this year. And that the US will make good on its threats to escalate the conflict. On Wednesday, JP Morgan made a new announcement that as a result of its new baseline, the bank has decided to downgrade its bullish call on Chinese stocks.
Sticking what was said earlier the previous week, the bank’s strategists wrote that the conflict will escalate as the US increases tariffs on imports from China. This, in turn, will strengthen the dollar while the Chinese Yuan will weaken further. The largest US bank (JP Morgan) is the latest bank to take the step more also to downgrade the China stocks which have already dropped into a bear market during the ongoing US-China trade war.
Although, the MSCI China Index which down 24% from its high in January is expected to rebound by 8.9% from the closing point Wednesday.
According to the bank’s strategists, a full-blown US-China trade war becomes our new base case scenario for 2019 as there is no obvious sign of resolving the confrontation between the US and China in the short run. JP Morgan also reviewed its forecast for the China economic growth for the coming year from 6.2% to 6.1%. This forecast doesn’t account for countermeasures such as monetary or more fiscal stimulus.
The war represents 1% hit to the growth of the economy.
“Higher tariffs are squeezing Chinese manufacturing’s profit margin, reducing the investment incentive and hiring, which would then drag on consumption through reduced income”. The US relations with China has deteriorated greatly in the recent times, and the escalating trade war which saw a tariff of 10% imposed on $200bn of Chinese imports by the US has seen unfold the following events in recent days:
- The US is planning a major “show of force” to serve as a warning to China.
- The Comment by Jack Ma that the US-China trade war would last for 20 years.
- A scoop from Bloomberg that a China hack infiltrated several Top companies in the US.
- The expected allegation speech by Pence of the Chinese election meddling.
The most exciting thing about the announcement made by JP Morgan is that the Chinese mainland market which was shut all week saw traders punishing the iShares China, Large Cap ETF. This lead to the stock dropping to a two weeks consecutive low in New York.
As JP Morgan is becoming less optimistic about the US-China trade war and the white house economic advisor saying there is no progress in the discussions with China over trade, a full-blown trade war seem inevitable. However, this trade war with China is undoubtedly going to affect the stock market significantly.
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