Trade war risk may be underestimated, recession fears may become dominant

Markets were mixed on Tuesday.

The S&P 500 fell 0.5 percent and the Nikkei 225 fell 0.1 percent but the STOXX Europe 600 rose 0.8 percent.

“Broadly speaking, markets are getting a bit more concerned about trade, though as has been the case over the past six months, tough rhetoric is almost always followed by softer solutions,” Ryan Larson, head of equity trading at RBC Global Asset Management.

However, Lisa Shalett, head of investment and portfolio strategies at Morgan Stanley Wealth Management, thinks that investors may be underestimating the risk of a blowup in trade tensions.

“With uncertainty rising, we no longer believe that the implications of Washington’s trade talk are benign,” she wrote in a note. “What’s more, this intensified headwind to growth may be coming just as growth momentum in global trade has started to wane.”

Indeed, Nicholas Colas, co-founder at DataTrek Research, on Tuesday wrote that “growing fears of an economic recession” would be the dominant market narrative for the second half of 2018.