Focusing solely on trade war with China, we should not neglect the possibility of escalating military tensions with the country.
Last week VP Pence gave a speech highlighting China’s “predatory” actions, including the Decatur incident. He was referring to a near collision between the USS Decatur, an Arleigh Burke-class destroyer and a Chinese Luyang-class destroyer. On September 30th, the Chinese ship was just 45 yards away when the US ship maneuvered to prevent a collision.
In 2016, the International Court of Arbitrations ruled against China’s territorial claim to the South China Sea. China rejected the ruling and continues to claim sovereignty of 80%+ of the area. When nearly hit by the Chinese destroyer, the Decatur was conducting a Freedom of Navigation Operation - asserting the free right of passage.
US-China tensions spilling out of the economic sphere and into the military arena highlight the gradual yet real shift toward a multi-polar world. The serious long-term market implications of this shift is a topic we'll continue to discuss from time-to-time.
In the near term, a surprise skirmish between the US and China would certainly rattle global markets.
Weekly Update through October 12, 2018 The S&P 500 dropped -4.07%, even as the Dow Jones was down -4.17%, the Russell 2000 declined -5.22%, and the Nasdaq lost -3.47%.
As for US bonds, they added 44bps.
Globally, the MSCI World Index lost -4.05% and the Barclays Global Aggregate Bond Index added 60bps.
The Euro Stoxx 50 lost -4.46% in local-currency (Euro) and -4.05% in USD. Meanwhile, the Topix declined -5.03% local-currency (Yen) and -3.63% in USD.
