Last Week’s Markets Weather Turmoil
Last Week’s Last Saturday, the President confirmed that he would subject Mexican and Canadian goods to the full 25% tariff – and Chinese imports to 10%.
However, Canadian energy, including oil, natural gas, and electricity, will be taxed at a 10% rate. The levies will take effect on Tuesday.
What effect will this have?
The first impact will be increased volatility and a move down in various asset classes.
Despite repeatedly stating that he planned to introduce tariffs, various asset markets appear to have convinced themselves that this was a bluff. So, we expect to see downward pressure as bulls are forced to reassess. We saw an initial selloff in European and Japanese stocks.
Bloomberg: Foreign stocks are selling off.
It should also cause the USD to rally as the inflation concerns, plus a potential reduction in trade, will reduce the outflow of USDs.
Bloomberg: The USD is rallying, as expected.
The reaction in bonds is more complicated. The cumulative effect of these tariffs is a magnitude greater than that of the first Trump administration. Inflation is going to trend up, especially due to energy.
So, this will likely cause the market to reprice rate cuts and potentially steepen the curve.
The case for foreign bonds is more straightforward. The global economy is weak, and they are looking at a recession. Hence, we expect them to rally, which is how the market has opened.
All of this should pull capital back to the U.S.
Further thoughts
Our team sitting in London always thought something like this was inevitable. Ultimately, the U.S. twin deficits (fiscal and trade) are unsustainable and were always likely to close. However, this process is rarely pretty.
That said, the big – and strangest – surprise is that energy imports are within scope. The U.S. remains an importer of specific oil grades, with Canada accounting for approximately 60% of this.
U.S. refineries are geared to process Canadian oil. Outside of this, the two main exporters are Mexico and Venezuela.
So, this element is a straight tax on U.S. consumers for no apparent benefit.
However, Trump has repeatedly said he wants a U.S. manufacturing renaissance. Pushing up input costs, especially energy, making exports more expensive, and reducing U.S. households’ real incomes seems an odd way to start. Ironically, the new Treasury Secretary made this point a year ago whilst still a private citizen.
Also, this is likely to be inflationary. Whether it is transitory or it causes broader issues remains to be seen. More importantly, it breaks a key campaign issue to bring inflation down.
Bloomberg: The bond market is starting to price rising inflation.
The final question is whether this will trigger a trade war. It remains to be seen, but as the world’s largest economy and with a considerable trade deficit, the U.S. has many more chips to play than most other countries.
In the long term, it will be difficult to push some of your trade partners into a recession and expect them to increase spending on items like defense.
Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.s
Last Week’s Markets Weather Tariff Turmoil
Last Week’s Last Saturday, the President confirmed that he would subject Mexican and Canadian goods to the full 25% tariff – and Chinese imports to 10%.
However, Canadian energy, including oil, natural gas, and electricity, will be taxed at a 10% rate. The levies will take effect on Tuesday.
What effect will this have?
The first impact will be increased volatility and a move down in various asset classes.
Despite repeatedly stating that he planned to introduce tariffs, various asset markets appear to have convinced themselves that this was a bluff. So, we expect to see downward pressure as bulls are forced to reassess. We saw an initial selloff in European and Japanese stocks.
Bloomberg: Foreign stocks are selling off.
It should also cause the USD to rally as the inflation concerns, plus a potential reduction in trade, will reduce the outflow of USDs.
Bloomberg: The USD is rallying, as expected.
So, this will likely cause the market to reprice rate cuts and potentially steepen the curve.
The case for foreign bonds is more straightforward. The global economy is weak, and they are looking at a recession. Hence, we expect them to rally, which is how the market has opened.
All of this should pull capital back to the U.S.
Further thoughts
Our team sitting in London always thought something like this was inevitable. Ultimately, the U.S. twin deficits (fiscal and trade) are unsustainable and were always likely to close. However, this process is rarely pretty.
That said, the big – and strangest – surprise is that energy imports are within scope. The U.S. remains an importer of specific oil grades, with Canada accounting for approximately 60% of this.
U.S. refineries are geared to process Canadian oil. Outside of this, the two main exporters are Mexico and Venezuela.
So, this element is a straight tax on U.S. consumers for no apparent benefit.
However, Trump has repeatedly said he wants a U.S. manufacturing renaissance. Pushing up input costs, especially energy, making exports more expensive, and reducing U.S. households’ real incomes seems an odd way to start. Ironically, the new Treasury Secretary made this point a year ago whilst still a private citizen.
Also, this is likely to be inflationary. Whether it is transitory or it causes broader issues remains to be seen. More importantly, it breaks a key campaign issue to bring inflation down.
Bloomberg: The bond market is starting to price rising inflation.
The final question is whether this will trigger a trade war. It remains to be seen, but as the world’s largest economy and with a considerable trade deficit, the U.S. has many more chips to play than most other countries.
In the long term, it will be difficult to push some of your trade partners into a recession and expect them to increase spending on items like defense.
Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.s