After Dow Slump, Recession Fears Rise With Dwindling Trade Deal Hope

The Dow futures are in the red once again following the response of China towards new sanctions imposed by the U.S., fueling the drop of the bond yield and fears of a possible recession.

The Dow slump expected to continue as President Xi finds growing support in China | Source: Yahoo Finance

Max Baucus, a former U.S. ambassador to China, said in an interview with CNBC that the growing nationalism in China is “emboldening President Xi,” which could allow the government to prolong the trade dispute throughout 2019.

“Don’t forget … Chinese (are) very patient historically, they’ll wait it out, they’ll play lots of different angles. They’re going to try to hang in there, waiting for President (Donald) Trump to come to them. There’s a feeling that nationalism is getting a little stronger … I think that’s also emboldening President Xi,” he said.

If the next round of trade talks between the U.S. and China end with little progress, the sentiment around the Dow Jones and the global equities market is expected to worsen, leading investors to ponder about the likelihood of a recession in the short to medium term.

Baucus emphasized that China is concerned about establishing a full accord with the Trump administration in the current phase of the talks.

“The Chinese are afraid to reach a deal with this president — it may not last, they can’t count on it, he might change his mind again.”

Is a recession likely as Dow struggles?

In late August, Chetan Ahya, the chief economist at Morgan Stanley, said that the risk of a full-blown global recession is increasing due to rising geopolitical risks.

Shall the trade tensions continue to escalate, Ahya said that a global recession within the next three quarters is likely.

[embedded content]

“Even as we have been revising our growth projections lower, we continue to highlight that the risks remain decidedly skewed to the downside. We expect that if trade tensions escalate further … we will enter into a global recession (i.e., global growth below 2.5%Y) in three quarters,” he said.

Up until late August, there were hopes that the U.S. and China would ease the dispute over the upcoming round of trade talks.

However, the newly imposed tariffs and the backing President Xi is reportedly receiving in China amidst the trade dispute indicate that a trade deal, even a partial deal, is not likely to happen by the year’s end.

Already, strategists have begun to consider the prospect of a recession following the inversion of the bond market yield. Without a strong response from the Federal Reserve in the upcoming months, analysts foresee a weakened global economy heading into the fourth quarter of 2019.