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.

Sara Eisen

Sara Eisen joined CNBC in December 2013 as a correspondent, focusing on the global consumer. She is co-anchor of the 10AM ET hour of CNBC's "Squawk on the Street" (M-F, 9AM-11AM ET), broadcast from Post 9 at the New York Stock Exchange.

In March 2018, Eisen was named co-anchor of CNBC's "Power Lunch" (M-F, 1PM-3PM ET), which broadcasts from CNBC Global Headquarters in Englewood Cliffs, N.J.

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