Take ‘trade tensions very seriously,' Stephen Roach warns a painful US-China trade war could still hit stocks

One of Wall Street's top Asia experts isn't ruling out a U.S.-China trade war.

According to Yale University senior fellow Stephen Roach, the threat is still real, and it could take a big bite out of stocks.

"The bottom line is China has been one of President Trump's core economic issues, and I'd be surprised if he just capitulates on this," Roach told CNBC's "Trading Nation" on Wednesday. "We have to look at the risk of some type of trade tensions very seriously."

Roach, who was Morgan Stanley Asia chairman for five years, said it's hard to have confidence in White House trade policy when Trump administration officials are constantly changing their minds.

On Monday, Treasury Secretary Steven Mnuchin said on CNBC's "Squawk Box" that trade talks with China have yielded "very meaningful progress." About 24 hours later, President Donald Trump contradicted Mnuchin — declaring he wasn't satisfied with the recent trade discussions.

"The Treasury secretary says one thing, one day. And, the president says something the next day," Roach said. "It's, sort of, back and forth in terms of getting clear and direct messages in what to make of this."

Trump has said he wants to impose tariffs on China as retaliation for a mammoth trade imbalance and alleged thefts of U.S intellectual property.

Roach doesn't think the White House approach would be effective.

"Tariffs are a bad thing. Trade wars are not easy to win, as the president seems to suggest," he added.

Roach warned it could have dire consequences for a stock market that's already vulnerable to another steep pullback.

"We had a valuation spike early this year. The market moved up parabolically in 2017. We've come off a little bit in the last four months," Roach said. "But the price-earnings ratio that I look at cyclically, the adjusted price-earnings ratio, is still overextended by any standard of the imagination."

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

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