With the trade war between the United States and China worsening as both countries continue to impose new tariffs on each other, the impact on currencies and commodities will be diverse as some will gain and others will take a hit.
Analysts expect that the US dollar, Japanese yen and Swiss franc will be major beneficiaries, while the Australian dollar, euro, British pound, Malaysian ringgit, Indonesian rupiah and other emerging-market currencies will suffer broad weakness.
Among commodities and agricultural products, copper, oil, steel, aluminium, soyabeans and cotton could be negatively impacted, while wheat and sugar that have been excluded from tariffs will benefit. Gold, meanwhile, is the clear winner in the dispute.
It is expected that cryptocurrencies will find favour too among investors who seek to hedge their exposure to conventional assets in uncertain times. With regards to the impact on the UAE and GCC, analysts expect that the oil price decline could affect the region indirectly while equity markets will take cues from global stocks.
"Risk aversion due to escalating trade tensions between the US and China could lead to an appreciation of safe-haven currencies such as the dollar and franc. Commodities on which the import tariff and duties have been imposed such as steel, copper and aluminium, and agriculture products such as soyabeans and cotton could be negatively impacted," said M.R. Raghu, managing director of Marmore Mena Intelligence.
"The import tariff is restricting the amount of such goods exported, thus resulting in stocks to pile up and prices to deflate. Commodities such as wheat and sugar, which are currently excluded from any tariff imposition, could benefit."
Jameel Ahmad, global head of currency strategy and market research at FXTM Global, predicted that if trade tensions continue to intensify into the second half of 2019 as current indications suggest, then the contenders to appreciate will be the dollar and yen. "The reason for this is due to their status as assets of safety for investors during times of market uncertainty."
He noted that the leading contenders to suffer drops in the event of increased trade tensions can be summed up as any currency that can be described as a "risk asset".
"The most well-known currencies that would be at risk to headwinds include the Australian dollar, euro and pound, but it is the currencies that belong to emerging markets that will suffer broad weakness as a result of the persistent US-China trade tensions."
These emerging market currencies that are proving particularly sensitive to trade tension news flow include the China's yuan and its Southeast Asian counterparts, meaning the likes of the Malaysian ringgit, Indonesian rupiah and others, he added. Ahmad noted that oil is the one primed to take a hit, due to the fears of weaker global economic momentum leading to less demand for the commodity. In terms of potential winners, the base case and champion of the commodities market is gold because of its status as an asset of safety during market uncertainty.
A Deutsche Bank report said that as a result of tension between the world's two largest economies, US equity markets have lost $5 trillion over the last 17 months. Bloomberg Economics predicted that if the trade war continues to escalate, it can shave off $600 billion from global output in two years. S&P said if 25 per cent tariffs hold for a year, they will shave off about 30 basis points from US growth and 0.1 percentage point from China's GDP in the next 12 months.
The International Air Transport Association has predicted that airlines will lose $7.5 billion in profits in 2019 due to the trade war and high fuel prices.
Impact on UAE, GCC
Raghu said the UAE could see a decline in activity as a result of increasing protectionism and restrictive trade practices.
"Though the markets aren't directly impacted by the trade war, the rising risk aversion and the ensuing uncertainties could lead to underperformance of emerging and frontier markets including that of GCC/Mena equities," he said.
Ahmad noted that the sensitivity of GCC and Middle East equities to the US-China trade conflict is more contained than other emerging markets.
But he cautioned that this does not mean that investors should discount the risk that the region is still exposed to negative headwinds from global growth concerns.
"GCC and Mena equities, including those in the, UAE are still considered as emerging markets and the probability of investors carrying a risk-off stance as a result of the US-China trade uncertainty does lead to the possibility of losses, should the trade tensions escalate again."
With regards to cryptocurrencies, Raghu said cryptocurrencies have found favour among investors who seek to hedge their exposure to conventional assets.
"Considering the volatile nature of the cryptocurrency market, it is hard to call which way prices would be heading. However, increased adoption of cryptocurrencies worldwide, a rise in institutional participation and uncertainty created by the events of the trade war could act as tailwinds for crypto prices," he said.
Ahmad added: "I think the rally in cryptocurrencies at the same time as the flare-up in US-China tensions is coincidental and not a result of the escalation in market uncertainty. There are no real catalyst that can be explained towards why cryptocurrencies are on the rise."
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