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Why markets aren’t worried about the escalating trade war – should you be?

Our market is poised to rise this morning even as China and the US head towards an all-out trade war after the Asian nation slapped extra tariffs on US$60 billion worth of US imports.

The move is in response to US President Donald Trump’s move to impose a 10% tariff on an additional US$200 billion worth of Chinese goods and some economists estimate this trade war could cost the Australian economy nearly $500 billion over 10 years and send our S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index into a tailspin.

But global investors have brushed off the threat with risk assets, including commodities, rising in overnight trade even as the US dollar strengthened (the greenback and commodities tend to move in opposite directions).

Our miners like BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) should recover from yesterday’s losses that were triggered by Trump’s second round of Chinese tariffs and the sector may actually enjoy consensus profit upgrades in the coming months (click here to find out why).

If you are confused with the upbeat mood, there are a few explanations for the market reaction. Firstly, investors have largely priced in the second-round trade war escalation and are becoming more de-sensitised to the belligerent Trump.

The 10% tariff, which kicks in next week and rises to 25% at the start of 2019, is also not as bad as the market had feared. There’s also a whole range of products from Apple Inc.’s iPhones to baby cots that are exempt as Trump tries not to derail economic growth in his own country as a result of the extra tax.

Investors are also probably relieved that China took a more measured response by targeting a much smaller amount of imports and setting an extra tax of between 5% and 10%.

This could give Trump an excuse to deescalate trade tensions between the world’s two largest economies without looking like he’s retreating.

More importantly, he may not feel pressured to carry out his threat of hitting all US$505 billion worth of Chinese imports as he has threatened to if China retaliated to yesterday’s fresh round of tariffs.

While investors have priced in this latest round of tariffs, I doubt markets have priced in an all-out trade war as this is likely to send the global economy into a recession.

It won’t only be resource stocks and those involved in global trade and manufacturing like logistics group Brambles Limited (ASX: BXB) and James Hardie Industries plc (ASX: JHX) that will be hit.

There will be very few places for ASX investors to hide although out-of-favour defensives like Telstra Corporation Ltd (ASX: TLS) and Spark Infrastructure Group (ASX: SKI) could find new friends if our economy wobbles.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Brambles Limited, Rio Tinto Ltd., and Telstra Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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