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In what was a highly volatile week for financial markets, marred by the tit-for-tat US China trade dispute, equity volatility swung sharply.
The dynamics of Global Investment Funds flows in 1Q19 can be characterized by a widening bond-equity divergence, and a visible moderation in inflows to EMs. Looking ahead, we expect EM outflows to continue at a moderate pace until global volatility eases. In a risk scenario, EMs to face more intense and persistent outflows.
Weekly update with most relevant news on financial regulation:
Equity markets bounced back trimming some loses inflicted by the renewed trade tensions, while volatility eased as Trump announced a six month extension of the deadline for imposing auto tariffs on Europe and Japan. Expectation of central banks support also contributed to the positive market tone today.
Risk-off mood abated somewhat as markets remain hopeful that US and China would eventually resolve their trade differences.
Cautious tone prevailed in financial markets during most of the morning, after the US and China failed to salvage a last-minute deal to avoid the latest US tariff hikes, in turn leading to the escalation of the trade war.

May 13, 2019

Closer to a trade war?

At BBVA Research we estimate that a tariff increase to 25% could bring Chinese GDP down 0.5 pp from our base scenario, in which China grows by around 6% in 2019. The impact on the other two trading blocks will be less severe, around 0.2 pp in the United States and 0.1 pp in the eurozone.
Risk-off mood resurfaced in financial markets, boosting VIX volatility and safe haven demand, although underlying hopes of an eventual trade resolution contained market losses.