BANK OF AMERICA: Here are 4 reasons the escalating trade war is just the 'tip of the iceberg'

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BANK OF AMERICA: Here are 4 reasons the escalating trade war is just the 'tip of the iceberg'

Iceberg

AP/Brennan Linsley

A boat steers slowly through floating ice, and around icebergs, all shed from the Greenland ice sheet, outside Ilulissat, Greenland.

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  • Investors have been worried about an escalating global trade war for weeks, but market conditions has worsened over the past few trading days.
  • Bank of America Merrill Lynch has issued an ominous warning, suggesting four reasons why trade war turmoil may just be starting.

Even before the most recent spate of developments, fears over a trade war were hitting a fever pitch.

A survey conducted by Bank of America Merrill Lynch the week before last showed a trade war was already viewed by fund managers as the biggest looming risk to the market.

Tensions have only been ratcheted higher since then. On Thursday, President Donald Trump announced roughly $50 billion of annual tariffs on Chinese exports. China wasted no time in responding, threatening wide-ranging trade restrictions of their own.

All the while, markets took a dive as investors headed for the exits. Unsure of the escalating trade war's effects, many investors have decided to watch how it unfolds from the sidelines.

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This approach may well prove to be the right approach, considering some recent comments from BAML.

"The question on everyone's mind is: Is this an 'ice cube' or the tip of an iceberg," Ethan Harris, the head of global economics research at BAML, wrote in a client note. "We see four reasons to increasingly worry about an iceberg."

Here are those four reasons, some of which are accompanied by commentary from Harris:

  1. New tariff measures and other trade war-stoking announcements are coming at an accelerating pace - "Ink on the steel and aluminum tariffs had barely dried and there are already reports in the press that tariffs on electronics imports from China are coming very soon," he said.
  2. Strong proponents of protectionism are driving the agenda - Harris is specifically referring to US Commerce Secretary Wilbur Ross, director of the White House National Trade Council Peter Navarro, and US Trade Representative Robert Lighthizer.
  3. Every time the administration announces another measure, they're employing a new kind of delegated authority. - "The use of national security as a justification for aluminum and steel tariffs is a particularly big step because it can be applied to anything that seems to hurt the economy," said Harris.
  4. The measures that have been announced so far haven't noticeably impacted the US trade deficit, which is still moving higher - "That could encourage escalation in the size of the targets for trade restrictions," he said.

For a glimpse of what's at stake, look no further than the benchmark S&P 500's price chart over the past week. If that's how the market reacts to the tip of the iceberg, how bad can it get? That's the unanswered question traders are clamoring to answer.

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Get the latest Bank of America stock price here.

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