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Trade wars: clash of the titans

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Darya Bobrova, Currency Analyst at FBS

In 2010-2012 there was a lot of talk about currency wars: countries competed in the devaluation of their currencies trying to increase the revenue from exports. Now the world is seized by a slightly different type of rivalry – the one related to trade. 

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Darya Bobrova, Currency Analyst at FBS

Darya Bobrova, Currency Analyst at FBS

A trade war is a conflict between two or more countries, in which the role of weapon is played by higher or new tariffs and other trade barriers. The trigger that sets trade wars in motion is protectionism: one country limits imports to help domestic producers, the exporting counties get hurt and fight back, and the clash spirals.

Trade wars have recently become one of the most discussed topics in the financial world. The US President Donald Trump should take the credit for it. According to Mr. Trump, the US had lost 60K factories and 6M jobs due to “unfair trade practices”. Trade was one of the key topics in his election campaign, and he kept pursuing the issue after the inauguration.

Firstly, the President withdrew the US from Trans-Pacific Partnership. Then he announced tariffs on solar panels, an industry dominated by China. In the latest move that took place in March, Trump administration enacted a 25% tariff on steel and a 10% tariff on aluminum. Tariffs were not implemented against Canada and Mexico – the North American neighbors of the United States – but an exemption is not permanent and will depend on NAFTA negotiations.

Where the US imports its steel from

Top countries/areas January 2018, value in $ millions

Top countries/areas January 2018, value in $ millions

Source: US Department of Commerce

Judging by the volumes of trade, trade fights will mostly affect the US relationship with China, Canada, and the European Union. If we look at the table, we will see that Canada and the EU are the top countries, from which the US imports steel. As for China, the share of its export to the US is not big compared to other countries. However, China is the world’s leading economy and a trade war between the US and China will definitely affect other countries.

Mr. Trump has adopted a brinkmanship strategy: he is trying to achieve an advantageous outcome by pushing dangerous events to the brink of active conflict. Let’s see how the US is managing trade relations with its key partners.

The USA vs China: Apocalypse Now

In 2017, American trade deficit with China reached the record high. US imports from China accounted for $506B, while exports were only $130B. Trump’s aim is to get things closer to a balance and reduce the deficit by $100B. He plans to achieve this goal by a $50-billion package of tariffs on 100 products that are supposed to be developed by using the intellectual property of US.

US-CHINA merchandise trade

US-CHINA merchandise trade

US-CHINA merchandise trade

Source: US Census Bureau

There may be some nifty bargains in place. According to Bloomberg, Trump’s administration is looking for alliances to push back against China trade in return for relief from American tariffs on steel and aluminum.

Although China does not want to participate in a trade war, the nation’s authorities claimed that they are ready to take counter-measures. China announced a $3-billion list of US goods for possible retaliation. The list includes 128 products from US agricultural products to aluminum and steel pipes. For example, American pork is facing a 25% tariff.

It’s necessary to make two points here. Firstly, China’s and America’s economies are closely tied. Chinese smartphones use chips from the US manufacturer Qualcomm, while many parts of Apple’s iPhones are made in China. So, both will suffer if these ties get damaged. Secondly, if the US implements its tariffs, American trade deficit with China will decline, but it will increase with other countries. Imports from China will be replaced by imports from Hong Kong, Taiwan, and South Korea – things like that already happened before, and the goal of protectionism won’t be achieved.

The USA vs Canada: A Fistful of Dollars

The US President initiated the renegotiation of the 23-year old North American Free Trade Agreement accusing the NAFTA of job losses in the States. Moreover, Mr. Trump is worried about the existing trade deficit.

America is negotiating from the position of force. It is threatening to leave the NAFTA – a stick – while offering Canada an exemption from the recent tariffs if the northern country makes concessions in the NAFTA – a carrot.

Trade between NAFTA members

Trade between NAFTA members

Trade between NAFTA members

Source: Trademap

The stumbling block in the talks is about the automotive industry: the US initially proposed a requirement, according to which cars should have 50% American-made content. The most recent news shows that the US is ready to soften its position. Yet, there are other “bones of contention” that won’t be easy to solve.

If there is no NAFTA deal in April or so, talks will likely be put on hold for months. Mexico’s new president will not take office until December, and the US has congressional midterm elections in November. It’s also necessary to mention that Canada is so integrated in the US supply chain, that whatever hurts the United States hurts Canada.

The USA vs Europe: Game of Thrones

Trade clash between the US and the EU is extremely dangerous: we already see a conflict underway. After Trump’s move, the European Union claimed that it is going to impose 25% tariffs on $3.5 billion of American goods. The EU is ready to enact tariffs on another group of goods as well, but it will do so only if the World Trade Organization will declare American tariffs illegal or after 3 years. Mr. Trump responded that if the EU imposes its tariffs, the US will retaliate with a 25% tariff on European cars. The EU has to inform the WTO of counter-measures by May 23 – within 60 days after the US tariffs are enacted.

Economic tensions between the US and Europe actually go beyond trade. The European authorities unveiled a plan designed to get big US tech companies, including Google, Amazon, and Facebook, to pay more tax in Europe.

How trade wars will affect the USA

Although Donald Trump said that trade wars are good and easy to win, it is certainly not true. The truth is that protectionism costs a lot because it leads to higher prices, lower productivity, and smaller competition. This has already been proven by history: in 2002, after George W. Bush imposed steel tariffs, GDP fell by $30.4 and about 200K jobs were damaged.

An increase in tariffs will make the prices in America go up. The auto and oil industries that use a lot of steel and aluminum will get hurt and will have to cut jobs. Other victims include companies that assemble products in China and then sell them in the US; US manufacturing, agricultural and transport-equipment firms that purchase goods in China for their production; US consumers and retailers that get a benefit because of the low-price goods that are imported from China.

What about the US dollar?

American protectionist policy will have a negative impact on the USD. Remember how the currency weakened on comments of Treasury Secretary Mnuchin about the trade benefits of a weaker dollar? Even the expected rate hikes of the Federal Reserve may not help the greenback and it will be most vulnerable against the safe-haven Japanese yen and Swiss franc. The dollar’s role as a reserve currency may decline. At the same time, the US currency can perform better versus higher-yielding commodity and emerging market currencies as the latter will lose ground in the risk-off environment. As a result, trade wars may bring a high volatility to the Forex market.

Conclusion

It’s obvious that the risk of trade barriers all around the world has become real. There are no doubts that trade wars between several countries will affect not only their economies but also have global consequences. A blow to Chinese economy will translate into lower commodity prices and problems for the exporter nations. Everywhere consumers and businesses will suffer high prices and the lack of supply. Commercial and investment ties between the countries will suffer.

Trump’s protectionism might support his short-term economic and political goals, but in the long term, it will have the catastrophic results. To be fair, trade has a smaller share of the US GDP compared with what we see for other G10 economies. It means that while the US will suffer because of trade wars, other major economies will suffer more.

To sum up, while we don’t want to indulge in doom about the prospects of trade wars, all we can do is hope that decision makers will manage to keep the situation under control and turn away from this slippery slope.

Trading

How has the online trading landscape changed in 2020?

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How has the online trading landscape changed in 2020? 1

By Dáire Ferguson, CEO, AvaTrade 

This year has been all about change following the outbreak of coronavirus and the subsequent global economic downturn which has impacted nearly every aspect of personal and business life. The online trading world has been no exception to this change as volatility in the financial markets has soared.

Although the global markets have been on a rollercoaster for some time with various geopolitical tensions, the market swings that we have witnessed since March have undoubtedly been unlike anything seen before. While these are indeed challenging times, for the online trading community, the increased volatility has proven tempting for those looking to profit handsomely.

However, with the opportunity to make greater profits also comes the possibility to make a loss, so how has 2020 changed the online trading landscape and how can retail investors stay safe?

Lockdown boost

Interest rates offered by banks and other traditional forms of consumer investments have been uninspiring for some time, but with the current economic frailty, the Bank of England cut interest rates to an all-time low. This has left many people in search of more exciting and rewarding ways to grow their savings which is indeed something online trading can provide.

When the pandemic hit earlier this year, it was widely reported that user numbers for online trading rocketed due to disappointing savings rates but also because the enforced lockdown gave more people the time to learn a new skill and educate themselves on online trading.

Dáire Ferguson

Dáire Ferguson

A volatile market certainly offers great scope for profit and new sources of revenue for those that are savvy enough to put their convictions to the test. However, where people stand the chance to profit greatly from market volatility, there is also the possibility to make a loss, particularly for those that are new to online trading or who are still developing their understanding of the market.

The sharp rise in online trading over lockdown paired with this year’s unpredictable global economy has led to some financial losses, but with a number of risk management tools now available this does not necessarily have to be the case.

Protect your assets

Although not yet widely available across the retail market, risk management tools are slowly becoming more prevalent and being offered by online traders as an extra layer of security for those seeking to trade in riskier climates.

There are a range of options available for traders, but amongst the common tools are “take profit” orders in conjunction with “stop loss” orders. A take profit order is a type of limit order that specifies the exact price for traders to close out an open position for a profit, and if the price of the security does not reach the limit price, the take profit order will not be fulfilled. A stop loss order can limit the trader’s loss on a security position by buying or selling a stock when it reaches a certain price.

Take profit and stop loss orders are good for mitigating risk, but for those that are new to the game or who would prefer extra support, there are even some risk management tools, such as AvaProtect, that provide total protection against loss for a defined period. This means that if the market moves in the wrong direction than originally anticipated, traders can recoup their losses, minus the cost of taking out the protection.

Not a day has gone by this year without the news prompting a change in the financial markets. Until a cure for the coronavirus is discovered, we are unlikely to return to ‘normal’ and the global markets will continue to remain highly volatile. In addition, later this year we will witness one of the most critical US presidential elections in history and the UK’s transition period for Brexit will come to an end. The outcome of these events may well trigger further volatility.

Of course, this may also encourage more people to dip their toes into online trading for a chance to profit. As more people take an interest and sign up to online trading platforms, providers will certainly look to increase or improve the risk management tools on offer to try and keep new users on board, and this could spell a new era for the online trading world.

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Trading Strategies

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Trading Strategies 2

By Paddy Osborn, Academic Dean, London Academy of Trading

Whether you’re negotiating a business deal, playing a sport or trading financial markets, it’s vital that you have a plan. Top golfers will have a strategy to get around the course in the fewest number of shots possible, and without this plan, their score will undoubtedly be worse. It’s the same with trading. You can’t just open a trading account and trade off hunches and hopes. You need to create a structured and robust plan of attack. This will not only improve your profitability, but will also significantly reduce your stress levels during the decision-making process.

In my opinion, there are four stages to any trading strategy.

S – Set-up

T – Trigger

E – Execution

M – Management

Good trading performance STEMs from a structured trading process, so you should have one or more specific rules for each stage of this process.

Before executing any trades, you need to decide on your criteria for making your trading decisions. Should you base your trades off fundamental analysis, or maybe political news or macroeconomic data? If so, then you need to understand these subjects and how markets react to specific news events.

Alternatively, of course, there’s technical analysis, whereby you base your decisions off charts and previous price action, but again, you need a set of specific rules to enable you to trade with a consistent strategy. Many traders combine both fundamental and technical analysis to initiate their positions, which, I believe, has merit.

Set-up

What needs to happen for you to say “Ah, this looks interesting! Here’s a potential trade.”? It may be a news event, a major macro data announcement (such as interest rates, employment data or inflation), or a chart level breakout. The key ingredient throughout is to fix specific and measurable rules (not rough guidelines that can be over-ridden on a whim with an emotional decision). For me, I may take a view on the potential direction of an asset (i.e. whether to be long or short) through fundamental analysis, but the actual execution of the trade is always technical, based off a very specific set of rules.

To take a simple example, let’s assume an asset has been trending higher, but has stopped at a certain price, let’s say 150. The chart is telling us that, although buyers are in long-term control, sellers are dominant at 150, willing to sell each time the price touches this level. However, the uptrend may still be in place, since each time the price pulls back from the 150 level, the selling is weaker and the price makes a higher short-term low. This clearly suggests that upward pressure remains, and there’s potential to profit from the uptrend if the price breaks higher.

Trigger

Once you’ve found a potential new trade set-up, the next step is to decide when to pull the trigger on the trade. However, there are two steps to this process… finger on trigger, then pull the trigger to execute.

Paddy Osborn

Paddy Osborn

Continuing the example above, the trigger would be to buy if the price breaks above the resistance level at 150. This would indicate that the sellers at 150 have been exhausted, and the buyers have re-established control of the uptrend.  Also, it is often the case that after pause in a trend such as this, the pent-up buying returns and the price surges higher. So the trigger for this trade is a breakout above 150.

Execution

We have a finger on the trigger, but now we need to decide when to squeeze it. What if the price touches 150.10 for 10 seconds only? Has our resistance level broken sufficiently to execute the trade? I’d say not, so you need to set rules to define exactly how far the price needs to break above 150 – or for how long it needs to stay above 150 – for you to execute the trade. You’re basically looking for sufficient evidence that the uptrend is continuing. Of course, the higher the price goes (or the longer it stays above 150), the more confident you can be that the breakout is valid, but the higher price you will need to pay. There’s no perfect solution to this decision, and it depends on many things, such as the amount of other supporting evidence that you have, your levels of aggression, and so on. The critical point here is to fix a set of specific rules and stick to those rules every time.

Management

Good trade management can save a bad trade, while poor trade management can turn an excellent trade entry into a loser. I could talk for days about in-trade management, since there are many different methods you can use, but the essential ingredient for every trade is a stop loss. This is an order to exit your position for a loss if the market doesn’t perform as expected. By setting a stop loss, you can fix your maximum risk on a trade, which is essential to preserving your capital and managing your overall risk limits. Some traders set their stop loss and target levels and let the trade run to its conclusion, while others manage their trades more actively, trailing stop losses, taking interim profits, or even adding to winning positions. No matter how you decide to manage each trade, it must be the same every time, following a structured and robust process.

Review

The final step in the process is to review every trade to see if you can learn anything, particularly from your losing trades. Are you sticking to your trading rules? Could you have done better? Should you have done the trade in the first place? Only by doing these reviews will you discover any patterns of errors in your trading, and hence be able to put them right. In this way, it’s possible to monitor the success of your strategy. If your trades are random and emotional, with lots of manual intervention, then there’s no fixed process for you to review. You also need to be honest with yourself, and face up to your bad decisions in order to learn from them.

In this way, using a structured and robust trading strategy, you’ll be able to develop your trading skills – and your profits – without the stress of a more random approach.

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Economic recovery likely to prove a ‘stuttering’ affair

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Economic recovery likely to prove a ‘stuttering’ affair 3

By Rupert Thompson, Chief Investment Officer at Kingswood

Equity markets continued their upward trend last week, with global equities gaining 1.2% in local currency terms. Beneath the surface, however, the recovery has been a choppy affair of late. China and the technology sector, the big outperformers year-to-date, retreated last week whereas the UK and Europe, the laggards so far this year, led the gains.

As for US equities, they have re-tested, but so far failed to break above, their post-Covid high in early June and their end-2019 level. The recent choppiness of markets is not that surprising given they are being buffeted by a whole series of conflicting forces.

Developments regarding Covid-19 as ever remain absolutely critical and it is a mixture of bad and good news at the moment. There have been reports of encouraging early trial results for a new treatment and potential vaccine but infection rates continue to climb in the US. Reopening has now been halted or reversed in states accounting for 80% of the population.

We are a long way away from a complete lockdown being re-imposed and these moves are not expected to throw the economy back into reverse. But they do emphasise that the economic recovery, not only in the US but also elsewhere, is likely to prove a ‘stuttering’ affair.

Indeed, the May GDP numbers in the UK undid some of the optimism which had been building recently. Rather than bouncing 5% m/m in May as had been expected, GDP rose a more meagre 1.8% and remains a massive 24.5% below its pre-Covid level in February.

Even in China, where the recovery is now well underway, there is room for some caution. GDP rose a larger than expected 11.5% q/q in the second quarter and regained all of its decline the previous quarter. However, the bounce back is being led by manufacturing and public sector investment, and the recovery in retail sales is proving much more hesitant.

China is not just a focus of attention at the moment because its economy is leading the global upturn but because of the increasing tensions with Hong Kong, the US and UK. UK telecoms companies have now been banned from using Huawei’s 5G equipment in the future and the US is talking of imposing restrictions on Tik Tok, the Chinese social media platform. While this escalation is not as yet a major problem, it is a potential source of market volatility and another, albeit as yet relatively small, unwelcome drag on the global economy.

Government support will be critical over coming months and longer if the global recovery is to be sustained. This week will be crucial in this respect for Europe and the US. The EU, at the time of writing, is still engaged in a marathon four-day summit, trying to reach an agreement on an economic recovery fund.  As is almost always the case, a messy compromise will probably end up being hammered out.

An agreement will be positive but the difficulty in reaching it does highlight the underlying tensions in the EU which have far from gone away with the departure of the UK. Meanwhile in the US, the Democrats and Republicans will this week be engaged in their own battle over extending the government support schemes which would otherwise come to an end this month.

Most of these tensions and uncertainties are not going away any time soon. Markets face a choppy period over the summer and autumn with equities remaining at risk of a correction.

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