Investors Prepare Their Portfolios for the Long Trade War Between the United States and China By Reuters

By Caroline Valetkevitch

NEW YORK (Reuters) – Investors are less and less confident about the possibility of a trade deal between China and China and are preparing their portfolios for a longer battle that could hinder global growth.

The escalation of recent days in the long-standing trade dispute between the world's two largest economies has fueled fears of a global economic downturn, causing a massive sell-off of shares driven by names trade-sensitive and a shift to low-risk assets like the United States. Treasures and gold.

China announced Monday that it would impose tariffs ranging from 5% to 25% on 5,140 US products on a list of targets of about $ 60 billion as of June 1st, after the lifting of the rights by the United States last week.

Investors have begun to adjust their investment outlook to increase business uncertainty, at least in the short term.

"We are seeing a trend towards more defensive companies and companies that can generate cash flow and dividends," said Quincy Krosby, chief market strategist at Prudential Financial (NYSE 🙂 in Newark, New Jersey. These adjustments will continue after Monday, she said. "There is more than that."

Among the concerns of equity investors, the collapse of trade talks between the United States and China could hurt earnings prospects. Investors expect tariffs to increase business costs and reduce profit margins, while the lingering uncertainty surrounding a trade agreement will hinder companies' ability to plan or make capital expenditures.

The sudden change in sentiment could lead some investors to turn to cash as well, some strategists said.

"I would not be surprised if some people are also raising funds," said Michael O & # Rourke, chief markets strategist at JonesTrading in Greenwich, Connecticut. "The market is starting to understand that the situation is as bad as possible."

The optimism that the United States was close to a trade agreement with China had been one of the pillars of this year's stock market rally. The record has been reached in recent weeks and is still up 12.2% since December 31st.

Investors expect the Federal Reserve to refrain from raising interest rates for the time being and that the economy remains stable, which has also supported the actions and maintained a relatively calm business climate.

Market volatility has increased. After months of calm in US equities, the Cboe Volatility Index, a barometer widely followed on the expected short-term volatility of equities, has reached its highest closing level since January. The index jumped again on Monday.

Among the shares, the hardest hit are companies that rely heavily on global trade.

Technology, which until now has been the main stock market this year, was the worst performing sector of the day, down 3.7%, while Apple Inc. (NASDAQ :), Boeing (NYSE) 🙂 Co and caterpillar Inc. (NYSE 🙂 were among the biggest revenue losses of the S & P 500.

At the same time, the S & P 500 utility index rose 1.1% and the real estate index remained stable.

While the S & P 500 lost 2.4% Monday, its highest percentage of daily loss since Jan. 3, US Treasury yields fell to their lowest level in six weeks.

The 10-year yields fell below the three-month Treasury bill yields. A sustained reversal of this part of the yield curve preceded every US recession of the last 50 years.

In addition to strengthening tariffs, traders are worried. China, the largest US creditor, could dump its Treasury bonds to counter the toughening trade policy of the Trump government.

Such a measure would raise US borrowing costs, strengthen the yuan and hurt Chinese exporters.

"The issue of low yields has become a critical issue," said Ian Lyngen, head of US rate strategy at BMO Capital Markets in New York.

Many investors continue to hope for a possible trade deal and some said the recent stock sale was not a big concern.

"I do not think the market is anything but breathtaking," said Jamie Cox, managing partner at Harris Financial Group in Richmond, Va. "If there was a situation in which there was no trade agreement, the markets would be much worse and it would be widespread."

But many wonder how long investors will tolerate the uncertainty surrounding the negotiations.

"Investors wanted to believe the best," said Kristina Hooper, chief global markets strategist at Invesco in New York. Yet, "clearly this relationship is deteriorating.This is not what investors hoped would be Friday."