Trade disputes will bring increased pressure on stocks
GLOBAL stocks rebounded in the second half of last week on optimism that maybe cooler heads will prevail before the trade wars get out of hand.
That optimism is likely to be short-lived. Investors should not only expect to be buffeted repeatedly by tit-for-tat measures by the US and China, but by global trade disputes on two other major fronts.
Such pessimism on the part of investors is reflected in demand for the ultimate risk-off assets, US Treasuries and German bunds.
The yield on 10-year Treasury notes hit an intra-day low of 2.36pc on Thursday, about the lowest since December 2017. Also substantiating investor preference for havens, the yield on 10year German bunds fell to 0.136pc, the lowest since September 2016.
Trade tensions are only likely to escalate given the support US President Donald Trump has received from across the aisle in the Senate.
Senate Minority Leader Chuck Schumer has urged Trump in a recent tweet to “hang tough on China”.
The view that China does not play fair on trade and investments is widespread among US politicians and may lead to bipartisan support for the Trump measures. On Friday, China’s state media signalled a lack of interest in resuming trade talks with the US under the current threat of higher tariffs, while the government said stimulus will be stepped up to buttress the domestic economy.
Then there’s the US Mexico Canada Agreement (or USMCA, as the revised version of the North American Free Trade Agreement is known) that the leaders of the three countries signed in December but has not been approved by the US Congress, where it faces significant opposition in the House of Representatives.
Speaker Nancy Pelosi suggested last month that the proposed accord be reopened to institute new provisions to ensure that labour standards are enforced, especially in Mexico. And even though Bloomberg News reports that the US is poised to lift steel and aluminium tariffs on Canada and Mexico in favour of stronger enforcement actions, a move that helps clear the way for USMCA ratification, a final treaty may not be in place anytime soon as key US politicians focus on the forthcoming elections.
Europe and Japan, as well, may soon be drawn into the tariff war.
Although Trump on Friday announced a delay in imposing tariffs on imported vehicles from the European Union, Japan and other nations for 180 days to pursue negotiations, that only kicks the can down the road.