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Stay Calm, Investors: Trump Tariffs Don't Constitute a Trade War

Stay Calm, Investors: Trump Tariffs Don't Constitute a Trade War

Thursday, 31 May 2018 08:21 AM Current | Bio | Archive

US Tariffs (Taxes) on Steel and Aluminum

President Donald Trump is threatening to raise taxes (tariffs) on U.S. consumers of steel and aluminum from Europe. Of course, the tax (tariff) increase is only if the steel or aluminum is brought in directly. If the steel is imported for example in the shape of a car there will be no tax (tariff) increase.

Investors should keep in mind that this is still not a trade war.

Trump’s policies taken all together will increase and not reduce the U.S. current account deficit. A trade war would require policies that create a declining real trade share of GDP.

There may be more negotiation today and the outcome is hard to predict given that trade policy is, and always has been, dependent on Trump's personal whims.

Italy and Uncertainty

Financial markets are obviously not back to normal. Yesterday, markets did however reacquaint themselves to what normal might look like. The euro rallied from its lows, the 2-year Italian bond yield fell by over a hundred basis points (bps), and the Italian bond auction went fine.

Italian politics continuous to be Italian politics. After the first rush of excitement there will probably be a more subdued market reaction to political events today. The consensus view seems to be that Italian elections are not that likely to happen before September at the earliest. In the meantime, Italian President Sergio Mattarella is waiting patiently by the phone to see if the two (2) “anti” parties can agree on a coalition government.

Plan B is a technocrat government. Investors should be reassured, there is no plan whatsoever to leave the euro.

Italian savings are roughly 4 times the level of Italian debt, which gives a pretty strong incentive not to do anything that threatens the value of the currency that is used to denominate those savings, which is of course the euro.

Inflation in the U.S. and the eurozone

The eurozone’s annual inflation rate came in this morning at 1.9 percent for May, which was well above the expected 1.6 percent while it was up from the 1.2 percent in April.

The price of crude oil - Brent reached $80 a barrel this month and played a key role in the uptick. Energy prices were up 6.1 per cent year on year, according to Eurostat. The price of food, alcohol and tobacco also posted a rise of 2.6 percent.

No doubt that the data will reinforce the European Central Bank’s belief that the inflation metric will return to its target, which is of “below, but close to 2 percent” over the median term.

In the United States we’ll get the personal consumer expenditure deflator today, the Fed’s fabled preferred measure of inflation. This data will not change the Fed’s path of hiking rates in June.

This will be for April, so, the full force of the rise in crude oil prices will not have been passed on. There are at least a few weeks between crude oil prices rising and the consumer feeling the full force.

The rising oil price will hit both headline and core measures of inflation when it does come through of course, because the core measure contains “embedded” oil prices in things like air fares and freight costs.

Emerging Markets

We all know that India together with China are two of the world’s biggest emerging markets and the latest headlines point to an ongoing growth recovery in India.

The industrial sector is expected to pick up while services, which contributes over 50 percent to GDP, is set to remain robust. Even farming, which has been a laggard, is recovering. Nevertheless, the banking sector remains in a fragile state, and problems in the banking sector have the potential to derail the ongoing growth recovery.

Investors that are interested in investing in India should keep in mind that a sustained rise in oil prices to $100 a barrel could lead to a re-emergence of some of the external and currency (Indian rupee INR) risks that existed pre-2014.

Rising interest rates in the U.S. and a stronger dollar have prompted investors to pull money out of stocks and bonds. The rupee (INR) has lost more than 5 percent against the dollar this year.

Yes, India offers investment opportunities, but never overlook to do your meticulous homework.

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

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Investors should keep in mind that this is still not a trade war.
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Thursday, 31 May 2018 08:21 AM
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