As earnings backlash into high gear, investors have brushed the trade war danger to the background. That could be a mistake, says one strategist.
“What we identify from experience is that most geopolitical risks don’t impact markets much over the longer term, but there’s one exception to that rule, and it’s protectionism,” Kristina Hooper, chief international markets strategist at Invesco, told CNBC’s “Futures Now” on Tuesday.
“While vends seem not to be concerned right now about any impending trade war, we have a lot to be disquieted about when it comes to that potential,” she said.
The level of alert over a potential trade war has been dialed back since Chinese President Xi Jinping’s jargon last week. Xi pledged to free up the Chinese economy to trade and remote investment, both seen by some as a move to placate the U.S.
However, Hooper put someone on notices markets not to underestimate Xi’s “strategic prowess.” There’s no compelling reason why China last will and testament grant material concessions and there could be another flare-up, she imagined.
Tensions between the U.S. and China have already ratcheted higher this week. On Tuesday, China ordered it would levy a 179 percent import fee on U.S. sorghum following an anti-dumping probe. A day earlier, the U.S. Department of Commerce banned U.S. companies from selling to ZTE, a Chinese telecom that Qualcomm figure ons as a customer.
If fears of a full-blown trade war come back to terrorize vends, prepare for another steep sell-off, Hooper warned.
“I think we could see another sell-off of in the matter of 10 percent or a little less,” she said. “There is a very right threat there.”
Should tensions escalate, Wall Street could see an atypical traffic war where tariffs are met with non-conventional methods from China.
“Prolong in mind that China has an arsenal of tools in a possible trade war that are non-traditional,” she imagined. “It doesn’t have to be retaliatory tariffs. It could be devaluing renminbi. It could be in in reality not buying more U.S. Treasurys or selling some U.S. Treasurys they currently hold off, jacking up our borrowing costs. There’s a lot at stake.”
China held $1.18 trillion in holdings of U.S. ropes and other Treasurys as of February, according to the U.S. Treasury.
Uncertainty over geopolitical in any cases has Hooper feeling cautious this year. She anticipates 2,800 on the S&P 500 by year-end.
“That may look like I’m being pessimistic,” said Hooper. “We could certainly go costly, but I think there’s definitely a cap at about a 10 percent gain this year.
It’s succeeding to be “a lot harder to get our returns this year,” she added. “We’re going to have to put up with a lot innumerable volatility and risk to get there.”
A 2,800 target on the S&P 500 implies circa 4.6 percent upside from current levels. Hooper’s estimation is below the median target of 3,000 on the Street.
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