How to play Trump's roller coaster ride of trade-war threats

President Donald Trump says the U.S. will never "surrender" in its economic rivalry with other nations. That's keeping analysts on alert for signs of a trade war.

In his first State of the Union, Trump promised to "fix bad trade deals and negotiate new ones." He refrained from naming specific nations or pacts, including the North American Free Trade Agreement that the U.S. is renegotiating with Mexico and Canada. But only last week, the president slapped tariffs on solar panels and washing machines, and the White House hinted Tuesday that it still may punish China for allegedly flouting U.S. intellectual property.

Trump's less hawkish tone in the State of the Union is the latest shift in the president's rhetoric on trade, which has veered between apocalyptic and reassuring. In an interview last week, the president said, "I may terminate NAFTA. I may not." He earlier told farmers his team is working hard to get a better deal.

Amid the uncertainty, a slew of analysts have said the risk of a trade war is elevated and recommend preparing now.

"He's been more volatile on trade than any president in my memory," said Phil Levy, senior fellow on the global economy at the Chicago Council on Global Affairs. "There's one stance one day, and another the next."

And Pimco Global Economic Adviser Joachim Fels said on Wednesday in a blog post that the U.S. is already engaged in a "cold currency war" with the goal of a weaker dollar - and that America has gained the upper hand because "the balance of power is asymmetric. U.S. President Donald Trump carries the bigger stick: the threat of protectionism. And so Europe and Japan have acquiesced; neither has stemmed their currencies' appreciation with words or actions." He added that "the Trump administration will probably continue to be interested in a weaker dollar as long as it doesn't lead to a bond market rout."

In an interview last week, Trump said he would be open to re-entering the Trans-Pacific Partnership, after withdrawing the U.S. from the Asia-Pacific trade deal shortly after taking office. "With any other president, you'd have the U.S. trade representative coming out pretty soon with the action plan," said Levy, who was senior economist for trade on George W. Bush's Council of Economic Advisers. "Here's it's just sort of tossed out."

One of the main areas ripe for problems if trade issues become more severe is developing countries that are heavily reliant on trade - Mexico being a prime example. Goldman Sachs has cautions on Russell 1000 Index stocks with heavy exposure to that country, while Morgan Stanley recommends shorting the Mexican peso.

ABN Amro points to potential trouble for other economies, flagging Hong Kong, Singapore, Malaysia, Thailand and South Korea as "particularly vulnerable" because they have relatively big export linkages with the U.S.

"As global trading hubs, Hong Kong and Singapore are in any case vulnerable to a serious rise in protectionism," ABN Amro Senior Economist Arjen van Dijkhuizen wrote in a note Monday.

There are more potential U.S. equity plays as well. Morgan Stanley strategists led by Michael Zezas write in a note on Jan. 22 before the tariffs were implemented that expectations of trade issues would favor defensive industries over cyclical ones and that sectors like apparel and semiconductors risked being hurt by supply-chain disruption.

U.S. autos face the largest risk from NAFTA withdrawal, according to Goldman strategists led by David Kostin, writing in a note on Friday. "Concerned investors should focus on U.S. stocks with the most domestic exposure," they said.

In foreign exchange, in addition to the short Mexican peso recommendation, Morgan Stanley suggested shorting the Canadian dollar, as well as going long on the Japanese yen versus the Korean won "to hedge against protectionist risks, given JPY's negative correlation to risk and the sensitivity of KRW to trade."

The analysts still see real economic or market impact from trade disputes as a low-probability event.

In the State of the Union, Trump "didn't take a lot of time to hammer the negative message, he accentuated the positive" said Evercore ISI analyst Terry Haines in an interview Wednesday. Market concerns about Trump's trade policy is unlikely to go away, but "they're trying to adopt a layered message here."

"The risks have increased," a Friday note from Barclays said, but "we remain optimistic that U.S. action and potential retaliation remain contained." ABN Amro agreed, saying its base scenario doesn't include a major trade war, while Goldman asserted that the NAFTA negotiations pose only a "minor risk" to the S&P 500.

And Morgan Stanley's strategists said a full "protectionist push" would be required to initiate a broader risk-off move.

Yet, those analysts still recommend preparing for the possibility that trade tensions will escalate.

The debate over U.S. trade-policy direction is "no longer hypothetical," Morgan Stanley said. Tariff action in particular "could challenge investors' perception whether the U.S. will adhere to current free-trade policies."