Tags: tariffs | steel | aluminum | global | economy

19th Century Policies Threaten 21st Century Market

19th Century Policies Threaten 21st Century Market
(Lucian Milasan/Dreamstime)

Friday, 01 June 2018 07:45 AM Current | Bio | Archive

US Tariffs on Steel, Aluminum

U.S Commerce Secretary Wilbur Ross told reporters Thursday on a telephone briefing that a 25 percent tariff on steel imports and a 10 percent tariff on aluminum imports from the EU, Canada and Mexico would go into effect at midnight.

This was expected and will have, above all, consequences on the U.S. political relationships with the EU, Canada and Mexico.

It could be interesting for investors to take note that Argentina, Brazil and South Korea, which are all three important “emerging economies,” and Australia remain exempt from the tariffs.

This kind of event cause a lot of noise, but investors could do well keeping in mind that “real” trade is unlikely to decline as a share of the world economy as a result of this policy.

The steel and aluminum industries are not important enough to lead to that.

Besides that, President Trump has also increased his rhetoric over NAFTA and in the near term, that is more serious.

President Trump stated yesterday: “The United States has been taken advantage of for many decades on trade. Those days are over. Earlier today, this message was conveyed to Prime Minister Justin Trudeau of Canada: The United States will agree to a fair deal, or there will be no deal at all.” The statement was an apparent response to remarks made by a frustrated Trudeau earlier in the day, when he announced retaliatory tariffs.

No doubt, international political tensions caused by the tariffs will remain high for a while.

Meanwhile, investors could do well to recall that the U.S. equity market is built on the assumption that U.S. companies are able to participate in an integrated and complex global trading system without too many obstacles. Imposing 19th century trade policies in the 21st century trading system would be a challenge to 21st century equity markets.

U.S. Employment situation Friday

Besides all that, today it’s U.S. employment situation Friday. The report is expected to show that the U.S. labor market continuous to support growth with low unemployment and reasonable job creation.

Job creation may indeed be hampered by what economists call “search friction.” It’s becoming more difficult to find the right worker for a job because there are fewer workers looking for jobs.

One solution to that is to get some workers to work longer. This increases the labor supply, but it does not necessarily show up in the data.

About the average hourly earnings that show up in the data, it is worth noting that average hourly earnings are not wages, and in the current labor conditions, there is no reason why average hourly earnings should resemble wages.

Federal Reserve

All this will have no impact on the Fed’s path of further tightening, albeit moderately, of its monetary policy.

In this context, Fed Governor Lael Brainard gave an interesting prepared speech stating: “I would not underestimate the challenge of calibrating monetary policy to sustain full employment and re-anchor trend inflation around 2 percent, while adjusting to sizable stimulus at a time when resource constraints are tightening, and the economy is growing above trend. I continue to view gradual increases in the federal funds rate as the appropriate path.”

Italy – Spain – Uncertainty

Italy has a new government. It is, on the face of it, a coalition between the two (2) “anti” populist parties. However, it could also be thought of as a “technocrat light.” The finance minister is a technocrat as are a few other ministers. The right wing FDI party did not join the government, which gives it a relatively thin majority. Taking it all together, this suggests a diluted program of change, especially on the fiscal side. The fiscal expansion that was proposed last week is unlikely to come through completely and of course there is absolutely no suggestion of leaving the euro.

Meanwhile in Spain, there is also a new government after Prime Minister Rajoy was ousted and the socialist Pedro Sanchez became automatically the new Prime Minister who will only have a quarter of the seats in Parliament.

Both new governments are not expected to stay long in power.

What does this all mean for the financial markets? Not that much near-term.

Emerging markets

Emerging equity markets were torn between healthy data and the escalation of trade tensions yesterday while many currencies fell with the Turkey’s lira falling more than 2 percent. Mexico’s peso also declined 1 percent.

The dollar (DXY) performing its biggest monthly gain in May since November 2016 was not helpful either.

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

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Imposing 19th century trade policies in the 21st century trading system would be a challenge to 21st century equity markets.
tariffs, steel, aluminum, global, economy
Friday, 01 June 2018 07:45 AM
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