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Investors May Think Tariffs Are Part of Trump's 'Art of the Deal'

Investors May Think Tariffs Are Part of Trump's 'Art of the Deal'
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Wednesday, 20 June 2018 08:32 AM Current | Bio | Archive

Tariffs & Financial Markets

Why are financial markets not reacting more to President Donald Trump’s threats of more and more tariffs on trade?

The profits of S&P 500 companies will be hurt by tariffs, fare more than the wider economy will be hurt by tariffs. The assumption has to be that markets believe that threats of additional tariffs are all part of the “art of the deal.”

Whether that is the most suitable negotiating tactic in international trade is a separate issue. The fact that equities have fallen somewhat, and U.S .Treasuries and the dollar have risen somewhat, which may hint that investors do not believe it is the best approach to minimizing risk.

But the basic conclusion could be that financial markets do not believe the Trump twitter feed.

The taxes announced on $50 billion of goods partially made in China are not something financial markets will worry too much about. These tariffs are relatively easily avoided, and they are unlikely to have a major impact on global trade.

Throwing around a couple of $100 billion threats here and a couple of $100 billion threats there ‘would matter’ if financial markets had become to believe that they might be true.

Meanwhile, the European Central Bank’s Forum on Central Banking continues in Portugal. Today, the big names of the world of central banking come forward. Draghi of the ECB and Powell of the Fed and Kuroda of the Bank of Japan are all scheduled to speak. All will be talking about policy.

The near-term comments are actually perhaps less important.

  • Draghi will sound as dovish as a non-dovish ECB policy will allow.
  • Powell will signal the steady and frankly rather dull pace of tightening that the Federal Reserve has embarked upon.
  • Kuroda will promise that this time prosperity is just around the corner.

The more interesting thing for economists, if not of immediate concern for financial markets, is how the central bankers see economic relationships evolving in a world of structural change.

Migration & Financial Markets

The politically difficult issues of migration and human rights do reach into financial markets, albeit less directly. In the long term, these issues matter because growth is driven by working populations and productivity.

Migration affects the former, prejudice politics affects the latter.

More immediately, and therefore of more immediate interest to financial markets, migration is a politically hot topic.

President Trump’s policies have been criticized by several senior members of the Republican party, and this division may matter ahead of the midterm elections.

In the Euro area, German Chancellor Merkel’s position on migration has been challenged within the governing coalition in Germany, although proposals to be discussed at next week’s heads of government EU summit seem likely to reduce the German political threat.

Emerging Markets

Argentine stocks could get some relief today as MSCI Inc., which is a leading American provider of equity, fixed income, hedge fund stock market indexes, considers an upgrade to emerging-market status.

Morgan Stanley expects the Argentina benchmark index to rally up to 20 percent over next 4 months in the event of an upgrade by MSCI or to sink 5 percent if it’s left as a lower-grade frontier market.

Performance of Argentine stocks and bonds over next 12 months will mainly depend on the government’s ability to drive positive expectations and “away from the current zone of disenchantment.” The question now is how MSCI clients will assess the sustainability of policies amidst the turmoil.

It’s also a fact that very relevant investment houses from all around the world have delivered MSCI with their views on why Argentina should be moved back to EM status this year.

OPEC

OPEC is scheduled to make a decision over oil production policy on Friday, though the gathering is already shaping up to be one of the most contentious meetings in years. Iran has already said it rejects a potential compromise that would see a small oil-production increase of about 300,000-to-600,000 barrels a day in the second half of the year. If Iran gets its will, then, over the short term at least, cheaper oil is not on the cards.

In this context, Dallas Fed President Robert Kaplan published yesterday an interesting essay (40 pages) titled: “A Perspective on Oil” wherein we read: “… there is a growing likelihood of an eventual global undersupply situation in which shale will be unable to keep up with demand growth…”

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.
 

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Why are financial markets not reacting more to President Donald Trump’s threats of more and more tariffs on trade?
tariff, financial, markets, opec, investors, trump
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2018-32-20
Wednesday, 20 June 2018 08:32 AM
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