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Markets overreact to protectionist threats

​Market reaction to the Trump administration's announcement of its intention to impose tariffs on up to $60bn worth of Chinese goods looks disproportionate relative to plausible estimates of the actual economic impact of the tariffs and possibly restrained Chinese reprisals. The direct earnings dependence on the US of Chinese and Asian equity markets is quite modest.

The equity sell-off more reflects worries about an escalation into a full-blown trade war. But on past form (notably steel/aluminium tariffs), the wedge between Trump's initial announcement and actual policy can be large. We think this reality will dawn on the markets in the coming weeks.

But last week's sell-off was also in part driven by concerns about liquidity and the woes of the Tech sector. We do not see any signs of worsening USD liquidity however. The visible threat to global growth for now is very modest.

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