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Morgan Stanley: Escalating Trade War May Spark Recession in 9 Months

Morgan Stanley: Escalating Trade War May Spark Recession in 9 Months
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Monday, 05 August 2019 03:08 PM

Morgan Stanley thinks a global recession will come if the trade war escalates through the U.S. raising tariffs to 25% “on all imports from China for 4-6 months.”

“As we view the risk of further escalation as high, the risks to the global outlook are decidedly skewed to the downside,” Morgan Stanley chief economist Chetan Ahya says, CNBC reported.

The firm believes a global recession will come in about nine months if the trade war further escalates through the U.S. raising tariffs to 25% “on all imports from China for 4-6 months,” Ahya said. “We would see the global economy entering recession in three quarters,” he said in a note to investors.

“About two-thirds of goods tariffed in this round are consumer goods, which could lead to a more pronounced impact on the US as compared to earlier tranches,” Ahya said. “Trade tensions have pushed corporate confidence and global growth to multi-year lows.”

Meanwhile, the latest eruption in the U.S.-China trade dispute pushed a widely watched Treasury-market recession indicator to the highest alert since 2007.

Rates on 10-year notes sank to 1.73% on Monday, close to completely erasing the surge that followed President Donald Trump’s 2016 election. At one point, they yielded 32 basis points less than three-month bills -- that’s the most extreme yield-curve inversion since the lead-up to the 2008 crisis -- though now that gap has since narrowed again slightly.

The moves follow reports that China is responding to the American president’s threat of more tariffs by allowing the yuan to fall and halting imports of U.S. agricultural products. Many major investors expect the slide in 10-year yields to continue given the risk that a protracted dispute creates for markets.

Count BlackRock Inc., the world’s largest asset manager, among them. The firm’s global chief investment officer of fixed income, Rick Rieder, foresees 1.5% for the 10-year.

“We could be in a significantly lower-rate environment for a while” given that central banks are poised to ease, Rieder told Bloomberg Television on Monday.

The outlook for steeper declines resonated in options markets, too, which saw trades targeting a drop through 1% this month.

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Morgan Stanley: Escalating Trade War May Spark Recession in 9 Months
morgan, stanley, recession, trade, war
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2019-08-05
Monday, 05 August 2019 03:08 PM
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