Politics and central bank is high on the agenda this week as markets continue to react to protectionist moves from Donald Trump, the Italian election over the weekend and look forward to four major central banks announcing their latest monetary policy decisions. We consider the outlook for forex, equities and commodities markets in the coming days.
Donald Trump has threatened for a while to impose tariffs to supposedly protect US jobs as part of his “America First” agenda. Sure enough, he announced last week that the US will impose a 25% tariff on steel imports and 10% on aluminium. This signals that he is willing to go ahead and push a protectionist trade agenda. The biggest economy in the world turning protectionist is a concern for global growth. Trade tariffs rarely do anything other than hurt economic activity. Trump’s argument is that he is protecting US jobs by putting up the prices of imports, which would increase demand for US goods, thus helping the trade deficit. However there are always two sides to a story. Countries such as Canada (at c. 16% the biggest importing country of steel into the US), Japan and the Eurozone will respond, and could now impose tariffs on US steel. That is a problem if it begins a trade war. This then reduces demand for US products and subsequently the net effect on the US trade deficit is zero, but overall economic activity is reduced. The biggest winner would be safe haven assets, which is why gold, US Treasuries and the Japanese yen have strengthened. This is also dollar negative as not only does it negatively impact future growth expectations but it is also deflationary which reduces expectations of faster FOMC monetary tightening. The near term dollar rally seems to have run its course with longer term bear trend ready to resume.