Democratic Vice President Kamala Harris is seen pursuing a path similar to President Joe Biden on trade if she wins, while Republican rival Donald Trump has threatened tariffs of 10-20% on all imports – including from Europe, with which the U.S. still has annual trade worth more than one trillion euros.
PIMCO was watching China’s yuan, which is trading near one-month lows against the dollar .
“At the moment, it’s low opportunity cost to be underweight on China FX, for example, because with everything that’s going on in the Chinese economy, they’re having to ease policy a lot,” said PIMCO emerging markets portfolio manager Michael Davidson.
“There are unlikely to be a lot of global scenarios where China is going to want to strengthen its currency a lot.”
He said recent China stimulus was important for reducing growth concerns, but added those measures would take time to have an impact.
In the near-term, the U.S. election rather than Beijing’s stimulus efforts are the driver for both Chinese and emerging markets, Davidson said.
“It gives you a little bit of this asymmetric protection if you were to see larger tariffs come on,” he said.
PIMCO expects China’s growth to slow to 4%–4.5% in 2025, from 5% in 2023 and 2024.
“If you take the outlines of the Donald Trump policies on trade literally, you have a 50% chance of a global trade war,” Andrew Balls, PIMCO’s Chief Investment Officer (CIO) for global fixed income also told Reuters.
“It does seem that there’s not a huge emphasis on the downside global growth risks associated with a trade war if that’s what we’re going to get,” Balls said.
He added that Europe was particularly vulnerable to “the shock of significant trade sanctions”, noting the continent’s close trade ties to China.
ECB’S RATE CUT SPACE
On the euro area, Balls said if the economy weakens more than anticipated, the European Central Bank had plenty of room to cut interest rates.
Market pricing that shows ECB rates will fall to around 2% seems broadly appropriate, but borrowing costs are more likely to end up below this level than above it, Balls said.
That gap, around 74 bps , widened to almost 88 bps in August.
“The government has a decent chance of lasting longer than people think, because it suits quite a lot of people politically, that they can have this government (which is) going to do austerity and become unpopular,” said PIMCO’s Philippe Bodereau, head of credit research, Europe.
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Reporting by Karin Strohecker, Dhara Ranasinghe, and Harry Robertson
Editing by Gareth Jones
Our Standards: The Thomson Reuters Trust Principles.
