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Exaggerated market reaction to trade war risk

​As trade talks between the US and China begin in Beijing, we examine how markets have responded to rising trade war frictions since 2016. Identifying 29 distinct events, we find: (i) a flight to safe haven assets; (ii) market moves that echo the global reach of a Trump trade war; and (iii) dollar strength against Asian and North American trading partners. But exaggerated market moves as tensions escalated in recent weeks suggest investors may be attaching excessive weight to the probability of a full-blown trade war.

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