Trump's second term could spark a trade war with China and hurt stocks, fears Nouriel Roubini

Protectionism is going to lead to a gradual increase in US inflation and that will be of concern, said Nouriel Roubini

Donald Trump's proposed plan to impose a 'universal baseline tariff' on most imports should he return to power has the potential to derail the bond as well as stock markets, noted economist Nouriel Roubini told Bloomberg in an interview on July 2.

"..an escalation of trade friction or a generalized trade war with the rest of the world, because our trading partners might also impose tariffs against the United States, is also a threat to the stock market," Nouriel Roubini said, adding that a 'global trade war is not going to be good for the stock markets'.

Read more on what a Trump victory could mean for the bond markets.

"I would say protectionism is going to lead to a gradual increase in inflation and that will be something that will be of concern, certainly to the bond market," he added.

Nicknamed Dr Doom, Roubini called all forms of tariff as 'regressive form of taxation', and said it remains to be seen if Trump will go ahead with his proposed plans of a 10 percent tariff on all imports, and up to 60 percent or more on Chinese goods. Self-proclaimed 'Tariff Man', Donald Trump is pitching for cutting income tax and instead relying on tariffs for revenue.

Citing the trade war as a global risk, Roubini said whatever happens on the trade side of the policy making depends on whether Donald Trump or any other Republican gets elected.

Stock market traders are gearing up for higher odds of a second term for Trump, and are betting that the trade policies could be supportive of a stronger dollar. “If Trump pushes ahead with some of his huge tariffs, that is inflationary,” Jane Foley, head of currency strategy at Rabobank London told Bloomberg. “That could mean that the Federal Reserve’s rate cutting cycle comes to a halt very fast — that would be dollar supportive,” she added.

According to Roubini, some of the other major concerns for the economy are a risk of some kind of geopolitical shock. "If there was a worsening of conflicts, there could be a spike in oil prices", he added. Chinese economy, he said, is more in a 'slow motion'.

However, in Europe, the elections could throw up starkly contrasting policy shifts, with elections in France, and UK unfolding. "There is a risk that if Le Pen reaches full majority, her plans could be dangerous for Europe", he said, commenting on French elections. However Roubini adds that some of the populist parties start with a populist agenda and then begin to moderate under the compulsions of 'market discipline'.