Chinese President Xi Jinping (L) holds a grand ceremony to welcome U.S. President Donald Trump outside the Great Hall of the People in Beijing, China on Nov. 9, 2017.
Lan Hongguang | Xinhua News Agency | Getty Images
The ongoing trade dispute between the U.S. and China is potentially creating “the most dangerous financial moment” since the global crash at the end of the last decade, former Treasury Secretary Larry Summers said.
Markets have been on sell-off mode since last week, with Wall Street seeing its worst trading day so far this year on Monday. There are deep concerns about the heightened tension in the relationship between the U.S. and China, after President Donald Trump said he would slap new tariffs on Chinese goods and the Treasury Department declared Monday that Beijing is manipulating its currency. The Dow ended more than 700 points lower and investors flocked to safe havens on Monday, including gold and bonds. The precious metal is hovering around a six-year peak and bond prices continue to fall.
“We may well be at the most dangerous financial moment since the 2009 Financial Crisis with current developments between the U.S. and China,” Larry Summers, who served as Treasury Secretary under former President Bill Clinton and as an economic advisor to former President Barack Obama, said on Twitter late Monday.
The global financial crisis, which began in 2008, became the worst economic disaster since the Great Depression that began in 1929.
Summers added: “Markets are now suggesting the highest risk of recession since 2011…The collapse in medium- and long-term interest rates is ominous.”
Meanwhile, analysts at Goldman Sachs said Monday that they do not expect the world’s two largest economies to reach an agreement over trade before the 2020 election. As a result, the investment bank is projecting two more rate cuts this year, one in September and another in October.
“The Fed has been increasingly responsive this year to trade war threats, bond market expectations, and global growth concerns,” Goldman Sachs said in a note.
“In light of growing trade policy risks, market expectations for much deeper rate cuts, and an increase in global risk related to the possibility of a no-deal Brexit, we now expect a third 25 basis points rate cut in October, for a total of 75 basis points of cuts (this year),” the bank added.
The Fed cut rates at its last meeting, but Chairman Jerome Powell noted that it was just a “mid-cycle readjustment” and lowered expectations regarding further cuts. However, since then, the trade war has intensified.