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President Donald Trump will change course on his policy of trade tariffs if it causes the U.S. stock market to suddenly lose value, the asset management division at UBS predicts in new research report.
"We have a strong conviction that the (Trump) administration's strategy will be reflexive to economic and market impact," Erin Browne, head of asset allocation at UBS Asset Management, said in the report.
"Should U.S. equities experience a meaningful drawdown, we expect the Trump administration to dial back pressure on trade to avoid undermining its ultimate priority, the strength of the U.S. economy," she said.
Trump has often made public statements correlating record highs in the stock market with the health of the U.S. economy. According to the Swiss bank, Trump's top priority is the performance of the country's economy and thus, if the stock market takes a dives due to his policies, he would soon reconsider imposing new tariffs and trade barriers.
In terms of what a "meaningful drawdown" would look like, UBS explained that it would be any stock market fall over 10 percent within a short-term time horizon.
Trump tweeted in January: "Dow goes from 18,589 on November 9, 2016, to 25,075 today, for a new all-time Record. Jumped 1000 points in last 5 weeks, Record fastest 1000 point move in history. This is all about the Make America Great Again agenda! Jobs, Jobs, Jobs. Six trillion dollars in value created!." But markets have fretted over rising tensions in global trade this year, following the imposition of several new tariffs on U.S. imported goods and the consequent retaliatory measures taken by its trade partners.
Investor fears range from the direct impact that the new duties could have on the global economy to the curbing of business sentiment — which could bring a spiral of other economic issues.
More recently, some of these concerns have lessened somewhat after a meeting between Trump and European Commission President Jean-Claude Juncker. However, Trump has also warned this week that there could be a new set of tariffs against $200 billion worth of Chinese goods.
UBS Asset Management added that tensions between the U.S. and China are likely to rise in the coming months and that investors should not underestimate the apparent ease between Europe and the U.S.
"We should therefore be careful not to extrapolate the sudden easing of trade tensions between the U.S. and Europe as having positive read-through for upcoming U.S.-China trade developments," Browne said in the report.
"Rather, the U.S., Europe and likely other allies look set to unite and isolate China on trade and tech issues, building leverage for what is shaping up to be a prolonged period of tension," she said.