A leading Wall Street firm is out with its worst-case scenario for the trade war.
In a note to clients, Medley Global Advisors managing director Ben Emons wrote a dire situation would unfold if U.S. trade with China entirely stops. As a result, large automakers, technology, and industrials could see a severe decline in annual sales.
According to Emons, “This could be the equivalent of a financial crisis given the large market capitalization of the groups in S&P 500. ”
Although it’s not his base case, he believes it’s wrong to write off the risk.
“If you are actually going to stop businesses from doing business in China and China can retaliate that way, too, you really are looking at what we call a doom scenario, right? Where the trade between U.S. and China could really come to a standstill,” Emons told CNBC’s “Futures Now ” on Tuesday.
The trade war is putting pressure on bond yields. On Tuesday, the spread between the 10-year Treasury note yield and the 2-year hit its lowest level since May 2007. A 10-year rate below the 2-year is often seen as a recession indicator.
Uncertainty sidelines investors
“There is real uncertainty in the financial markets because of this trade war and this complexity,” Emons said. ”(That) leads people to go into safe assets and stay in there until they get a clear vision on this trade war.”
He believes volatility is bound to intensify in the coming weeks.
“We’re dealing with such uncertainty that people are sidelined. They are just disengaged, and that’s why you get this fluctuation in markets because volatility is really fed by the illiquidity of the market,” Emons said.