Protectionist Trumps’ Business Plan

Daily Analysis - 08/03/2018

Protectionism

Trumps Tariffs upset China, Europe and the rest of the World. The markets are trying to digest any rumors or comments that come from Trump or the White House. ECB meeting would be in focus as it is the most important event on the docket for the day.

China Warns of a Potential Trade War

U.S. President Donald Trump took office in 2017 adopting a protectionist agenda focusing on making America great again. Since then, dark clouds on trade have gathered over the world’s two largest economies. China has a small segment on U.S. steel imports, though its massive industry expansion has helped create a global surplus of steel that has driven the prices down.

Trump is expected to impose tariffs of 25% on imported steel and 10% on imported aluminum this week. The White House is planning to offer Canada and Mexico a 30-day temporary exemption from new tariffs based on national security reasons.

The U.S. tariffs are expected to go into effect in two months. The target is to face cheap imports, especially from China, that Trump believes undermine U.S. industry and jobs. Trump is also considering trade sanctions against China into intellectual property practices.

China’s Foreign Minister Wang Yi said on Thursday, China is ready to respond in the event of a trade war with the United States while warning that such a war would be a lose-lose situation for both sides. U.S. soy beans, aircrafts and cars are widely seen as vulnerable to possible retaliation from Beijing.

Chinese exports for February were up 44.5% from a year earlier, beating market expectations, while imports grew 6.3%. As a result, China has a trade surplus of $33.74 billion for the month, and a January-February trade surplus with the United States of $42.92 billion.

At the same time, today the European commissioner Moscovici said that retaliatory measures against U.S. tariffs would be 'immediate'.

Stocks are still vulnerable

On Wednesday, stocks retreated from their session lows following the announcement that Canada and Mexico could be exempt from tariffs proposed by President Donald Trump.

Dow Jones 30 ended 83 points lower at 24,801 after falling more than 300 points. The S&P 500 closed a few points lower than the breakeven point at 2,726 after falling nearly 1% in the beginning of the session. Among the best-performing were the real estate and tech sectors.

The tech-heavy Nasdaq composite managed to close 0.4% higher at 7,396, hitting a session high in late-afternoon trade, as Facebook share rose 2.2% and Google share rose 1.3%.

Stocks fell sharply earlier on news that Trump's top economic advisor, Gary Cohn, had resigned after the president proposed tariffs on steel and aluminum imports. Cohn supports more business-friendly policies, and therefore is seen as well-liked by Wall Street. His departure raised odds that a trade war could take place in the near future. Shares of big metal users like General Motors and Boeing fell on the back of his resignation.

White House press secretary Sarah Huckabee Sanders said the plan could include exemptions for Mexico and Canada, two key U.S. trade partners. Trump is expected to release more details on his tariffs plan this week.

ECB monetary meeting

Markets in Europe opened lower on Thursday, as investors are cautious over the threat of a trade war between the European Union and U.S. and as they await the latest interest rate decision from the European Central Bank (ECB).

The ECB is to hold its meeting on monetary policy in Frankfurt. The decision on monetary policy is due at 12:45 GTMT and ECB President Mario Draghi will speak at a press conference at 13:30 GMT. Economists expect he will have a cautious tone given the recent surge in economic uncertainty and give few clues paving the way for the end of the quantitative easing under which the bank has promised to buy €30bn of bonds a month until September 2018.

Words always matter to central bankers. The smallest hint that European policymakers are preparing for a change in policy can trigger big moves in markets.

Investors are split on whether the council will alter its guidance. Some think Mario Draghi would prefer to keep his options as open as possible at a time when big political risks remain uncertain.