“The ongoing trade dispute between the US and China appears to have escalated into a full-blown economic conflict,” David Kostin, chief US equity strategist at Goldman Sachs, wrote in a note to clients.
Goldman Sachs raised its estimate of how much the trade war will hurt the economy. The firm now expects fourth-quarter US growth to slow to 1.8%, compared with 2% previously.
Trade tensions spiked earlier this month after President Donald Trump vowed to impose a 10% tariff on $300 billion of US imports from China. Beijing allowed its currency to sharply lose value, raising fears of a currency war.
Beijing condemned the protests as “terrorism” and state media published a video showing Chinese military vehicles on Hong Kong’s border.
The rush into ultra-safe government bonds have caused Treasury yields to collapse. The 10-year Treasury rate tumbled below 1.7% on Monday, a sharp slide from 3.2% last fall. The 20-year Treasury yield is nearing all-time lows.
US stocks declined last week for the second week in a row. The S&P 500 is now sitting about 5% below the all-time highs set in late July prior to the outbreak in trade tensions.
“The bear is alive and kicking,” Morgan Stanley equity strategists led by Michael Wilson wrote in a note to clients on Monday.
Rather than the trade war, Wilson argued investors are reacting negatively to the realization that the Fed has gone from very hawkish to very dovish due to the darkening economic environment.
“The Fed has reversed its position over the past 9 months because the outlook for the economy, both here and abroad, deteriorated significantly,” he wrote.