Tags: donald trump | trade | investing | china

Trump's 'Hokey Pokey' Dance Unsettles Investors

Trump's 'Hokey Pokey' Dance Unsettles Investors
(Evan Vucci/AP)

By    |   Monday, 26 March 2018 10:57 AM

President Trump’s taxes on U.S. consumers of steel and aluminum have been significantly diluted. Two thirds on the tax on steel consumers has been suspended and over half of the tax on aluminum consumers. This means that the Trump tax on trade, if passed through entirely, will cost the average American consumer of a six-pack of U.S. brewed beer less than 6 cents, of course if the import tax of 10 percent on aluminum is passed on to the consumer.

This raises questions about how serious the trade war actually is. One thing is for certain so far; there’s lots of spin. Happy smiling steelworkers applauding the initial declaration, but the substance seems to be somewhat less. No one appears to be asking the steelworkers what they think about the recent tax U-turns.

Meanwhile, Treasury Secretary Mnuchin said on ‘Fox News Sunday’ he’s cautiously optimistic the U.S. can reach an agreement with China that will avert the need for President Donald Trump to impose tariffs on at least $50 billion of goods from China.

If so, and that’s with a big ‘If’, all this starts to look more and more like a phony trade war (which we all should hope for) than a real trade war, and again, “if so’, the economics of the taxes (tariffs) that have been announced so far, should therefore be diminished.

Nevertheless, investors could do well taking note that Wei Jianguo, former China vice-minister of commerce and now vice-president of the China Center for International Economic Exchanges, said China is fully prepared to fight back once the United States takes action on the memorandum that President Trump signed last Thursday and that would impose tariffs on up to $60 billion in imports from China and restrict Chinese investment in the U.S.

The U.S. products subject to tariffs from China are mainly agricultural products, but the possibility is still out there that China could impose tariffs on more US products from key sectors including automotive, airplanes and photographic paper.

Nevertheless, a world of spin without substance does have some implications for financial markets.

The Trump Twitter feed is having uncertainty about the future as Friday’s budget veto ‘hokey pokey dance’ demonstrates.

Financial markets do not want to see a United States President dancing a policy hokey pokey. This unsettles investors and creates an additional risk premium in the financial markets. There is also a perception that the turnover of staff in the U.S. administration, which is the highest of any U.S. administration in modern history, may increase the uncertainty about future policy as established politicians who follow predictable policy reactions on less evidence.

This means for investors that market volatility is very unlikely to disappear any time soon.

Today, there are a few central bank speakers to pay attention to.

In the Euro area, the ‘anti-dote to easing addiction’ will be presented by ECB and German Bundesbank President Weidman with speculation about ‘how’ the European Central Bank (ECB) will be exiting its bond buying, not ‘if’ the ECB will be exiting its bond buying. Giving the views of the German faction on the ECB Governing Council his views could be interesting.

Besides that, today in the U.S. we have 3 Federal Open Market Committee (FOMC) Members to speak, which are the outgoing New York Fed President William Dudley, Cleveland Fed President Loretta Mester and Fed Vice Chairman for Supervision Randal Quarles.

Their remarks will have value for investors.

Last Friday, Atlanta Fed President Raphael Bostic gave interesting remarks in a prepared speech.

Bostic finds it appropriate for monetary policy to move toward a more neutral stance with the economy operating near its potential and inflation approaching the long-run target. Interestingly, his forecasts for the next several years assume that fiscal policy will provide a relatively ‘modest’ boost to GDP growth while he feels that despite strong employment growth, U.S. labor markets are not substantially overheated. He also expects the relatively calm inflation environment to persist but sees the potential for inflation to run somewhat ‘above’ the 2 percent target, which is of course important for investors if that comes through.

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President Trump's taxes on U.S. consumers of steel and aluminum have been significantly diluted. Two thirds on the tax on steel consumers has been suspended and over half of the tax on aluminum consumers. This means that the Trump tax on trade, if passed through entirely,...
donald trump, trade, investing, china
Monday, 26 March 2018 10:57 AM
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