China- US trade war – market game changer?

Posted: January 11, 2018 in Uncategorized

China announced they could decreasing the US Treasuries purchases.

This is BIG, if true.

It is quite complicated, but I try to summarize.

Trump said that he will really start to target trade restrictions towards different country.

China, biggest holding of US Treasury, might be saying…pay attention – if you target us – we target you.

In effect one of the best bond manager, Bill Gross, said the demand for the current 10 -year auction was incredibly strong.

In effect I think a China  message to the US.

But what if Trump follow up and China respond in kind?

It would be a market game changer.

The US Tax Bill increases the US Debt trillions. If there are lesser buyers the yield (price the US pays for you to buy the Treasuries) will spike.

This Treasury yield has a lot of consequences.

-All the stock market valuation is correct at the current price valuation. As the market is stretched a yield increase will provoke a market repricing with an easy correction  -10% at least.

-All mortgages (also in Australia) will have to be increased as the cost of money will increase (real estate price will fall)

-Bond market (the fixed rate one, not floating or inflation) will fall

-As the cost of money increases, the chances of inflation will increase provoking the Federal Reserve to increase rate and further markets falls.

At this point I think it is just scare mongering, but this is to be watched!

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