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Investing.com - The threat of elevated U.S. tariffs has raised the risk of a higher volume of cheaper goods from China being diverted to the European Union, according to analysts at UBS.
In a note to clients, the brokerage warned that this trend could weigh on Europe’s already-struggling manufacturing sector and dampen prices for items.
Import volumes from China in the 20-member euro area substantially increased in the first quarter, data from UBS and Haver Analytics showed.
However, the analysts flagged that it remains difficult to disentangle how much of this pick-up is temporary -- "and, hence, likely to unwind" -- and how much is due to a "genuine" acceleration in euro area demand for Chinese imports.
Meanwhile, import prices from countries outside the euro area, particularly China, have largely been driven by energy costs, the analysts noted, adding that, excluding fuel, import prices have been "much less volatile."
Evidence of disinflationary spillovers from China to the euro area has thus been limited, they argued. Citing a rough, "back-of-the-envelope" calculation, the UBS analysts suggested that every one percentage-point uptick in Chinese import prices adds just around one to two basis points to headline inflation in the currency bloc.
"This also suggests that only a relatively large shock to China import prices would have a material impact on Eurozone inflation. However, we acknowledge that this approach likely underestimates the sensitivity of Eurozone inflation to Chinese producer prices," the analysts wrote.
The comments come as U.S. President Donald Trump has threatened to slap heightened "reciprocal" tariffs on a range of countries, including China and the European Union, which includes many euro area nations.
While China has agreed to a fragile trade truce with Washington, Brussels is continuing to carry out negotiations with the White House. On Monday, the EU was not included in dozens of letters sent out by Trump to 14 different countries detailing their new tariff rates -- which analysts and media reports interpreted as a possible sign that an agreement could be forthcoming.