(Bloomberg) -- The U.S. tariffs on Mexico might be off, but Citigroup Inc. strategists warn that trade tensions are set to climb, roiling financial markets from stocks and bonds to commodities.
“Tensions are mounting and the outcome looks more likely to be driven by politics than economics,” Citigroup’s Global Macro strategy team, led by Mark Schofield, wrote in a June 10 note to clients. President Donald Trump “is likely to continue to take a hard line.”
Citigroup’s base case sees Trump applying 25% tariffs on the remaining Chinese goods not yet hit -- a “shock and awe” strategy in the run-up to a handshake deal -- along with duties on automobile imports and increased tensions with Europe and Japan. If the Federal Reserve doesn’t cut interest rates, this scenario leaves markets on course for the following:
A “full scale bear market” in the S&P 500 Index, sending it 20% down from its April peak, to 2,350A tumble in 10-year Treasury yields to 1.50% and “maybe lower”A surge in gold prices to $1,600 an ounce, a level unseen since 2013
The good news is that the landscape “may be transitioning” to a different scenario, with no trade deal forthcoming with China, but the Fed providing 75 basis points worth of rate cuts. That would see new highs on the S&P 500, with 10-year yields as high as 2%. Gold would still gain thanks to a cheaper dollar, with a $1,500 target, the Citigroup team wrote.
A third scenario has a trade deal at the Group of 20 summit at the end of this month in Japan, where Trump may meet with Chinese President Xi Jinping. Equities would surge, with emerging markets “significantly outperforming.” Yields would rise while gold would slip along with the dollar.
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