Do Words Hurt More Than Actions? The Impact of Trade Tensions on Financial Markets

Abstract

In this paper, we apply textual analysis and machine learning algorithms to construct an index capturing trade tensions between US and China. Our indicator matches well-known events in the US-China trade dispute and is exogenous to the developments on global financial markets. By means of local projection methods, we show that US markets are largely unaffected by rising trade tensions, with the exception of those firms that are more exposed to China, while the same shock negatively affects stock market indices in EMEs and China. Higher trade tensions also entail: i) an appreciation of the US dollar; ii) a depreciation of EMEs currencies; iii) muted changes in safe haven currencies; iv) portfolio re-balancing between stocks and bonds in the EMEs. We also show that trade tensions account for around 15% of the variance of Chinese stocks while their contribution is muted for US markets. These findings suggest that the US-China trade tensions are interpreted as a negative demand shock for the Chinese economy rather than as a global risk shock.

What Influences on Stock Prices Have Occurred Due to the U.S.- China Trade Dispute?

“…Found that compared with the Chinese stock market, the U.S. stock market could have impacts and be affected by the shipping freight markets in a more sensitive manner. Additionally, contagion risk between the two markets increases in most cases due to a decrease in the volume of the U.S.-China international trade [11]. showed that the U.S. markets are largely unaffected by the rising trade tensions between the U.S. and China while the same shock negatively affects stock market indices in emerging economies and China.…”