Friday, April 6, 2018

Capital Markets: "Trade Trumps Jobs"

From Marc to Market:
Trade and equity market volatility, which are not completely separate, continue to dominate investors' interest. Many had come around to accept that while trade tensions were running high, it was likely to be mostly posturing. This conclusion may have helped lift the S&P 500 around 3% over the past three sessions.

However early in the Asian time zone, President Trump's rhetorical flourish pushed investors off-balance. He instructed Trade Representative Lighthizer to consider putting a tariff on a further $100 bln of Chinese exports to the US in retaliation for what he called China's "unfair retaliation." This is not the amount that will be raised, but the value of the goods that will be subject to new tariffs. That means that if the tariff is 25% on $100 bln of goods, it would theoretically raise $25 bln.

In terms of size and escalation, if implemented this would be a trade war. And China has threatened to fight back. That said, the real historical experience is not clear. Recall that the US had slapped 100% tariffs on some Japanese goods in early1980s. Few called this a trade war. In any event, the willingness to double down sends a powerful message. Trade Representative Lighthizer tried to play it down, noting that none of the tariffs will take immediate effect. The tariffs are subject to a 60-day public comment period (open season also for lobbyists). And this next set of tariffs have not been decided.

Trump's signal raises the stakes. The increased stakes are translated into greater risks and higher volatility. The news initially knocked equity markets and the dollar down, but not by a lot. The MSCI Asia Pacific Index slipped marginally (less than 0.1%), and some bourses were spared, like Hong Kong and the Hong Kong Enterprise Index, which tracks H-shares. Singapore, an important entrepot, making it particularly vulnerable to trade wars, rose by an impressive 1.2%.

European markets are a bit heavier, with the Dow Jones Stoxx 600 off 0.5% in late morning turnover. Materials, consumer discretionary, and information technology are off the most, while utilities are posting small gains, and real estate is not far behind. With today's pullback, this European benchmark is still up almost 0.9% for the week. The S&P 500 is off around 0.75%, which would offset most of the gains on the week.

The steady stream of disappointing economic data from Europe has continued. The continued data surprises mean that economists continue to underestimate the slowing of the eurozone economy. Today Germany was expected to report a small (~0.2%) rise in industrial output. Instead, it reported that industrial production in February fell 1.6%, the largest drop in nearly four years. The year-over-year pace closed to 2.6% from a revised 6.3%, which is the lowest since March last year....MORE