Stock markets were shining since the start of this year amid prospects for the trade deal between the United States and China. The S&P 500 had hit a record high last week and the broader market index was up 17% before the latest selloff.
The stock markets took a big U-turn this week following Donald Trump’s new threats of higher tariffs on Chinese products. The broader market index started reversing gains that it had generated during the first four months of this year.
Traders and investors are worrying that the market could form a bearish pattern if trade talks fail between the two largest economies. The majority of forecasts from big banks shows that the S&P 500 index is entering into a correction phase and the index could easily lose 10% of its value.
UBS analyst Keith Parker expects China to lose 1.2% to 1.5% of its GDP in case of a full-fledged trade war while U.S could lose 0.1% of its GDP.
“Fasten your seatbelt and don’t hold your breath,” Bank of America strategists wrote. “The latest escalation of the trade war was completely unexpected, despite the strength of the economy and the markets. This is evident from the immediate negative reaction of U.S. equity futures to the news.”
Donald Trump has said that he will impose 25% traffic on $200 billion of Chinese good this week. In addition, he says he can impose higher tariffs on hundreds of Chinese products in the future if China hinted any retaliation.
The impact of trade would be greater on companies that have extensive global footprints. China is one of the largest markets for energy and mining companies. For instance, it alone consumes almost half of the global iron ore and copper supplies. Similarly, it is the world largest oil consumer. Industrial and tech companies fear that the trade war is likely to have a negative impact on their financial numbers. Trade war could also have a big impact on the global GDP growth forecasts, which is increasing the risk of recession in global economies.