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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.

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Global stocks slide on inflation fears, dollar gains

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Global stocks slide on inflation fears, dollar gains 1

By Herbert Lash

NEW YORK (Reuters) – The Nasdaq recovered as the bond rout retreated on Friday, but most other equity markets swooned around the world as data showing a strong rebound in U.S. consumer spending kept fears of rising inflation alive.

Shares of Amazon.com Inc, Microsoft Corp and Alphabet Inc edged up after bearing the brunt of this week’s downdraft to help the Nasdaq shake off its worst day in almost four months on Thursday.

The Nasdaq Composite advanced 0.56% while the S&P 500 slipped 0.48% after a late-session surge failed to hold. The Dow Jones Industrial Average fell 1.51%.

U.S. consumer spending rose by the most in seven months in January as low-income households got more pandemic relief money and new COVID-19 infections dropped, setting up the U.S. economy for faster growth ahead.

The benchmark 10-year Treasury note on Thursday shot to a one-year high of 1.614%, a move that rocked world markets. The note’s yield is up more than 50 basis points this year and is now close to the dividend return of S&P 500 stocks.

Yields on the 10-year note fell steadily throughout the session to trade 11.7 basis points lower at 1.3981%.

The amount of money swirling through markets and U.S. stocks at close to all-time highs has caused investor angst, said JJ Kinahan, chief market strategist at TD Ameritrade in Chicago.

“Many people are taking some profits and not necessarily reinvesting that money quite yet,” Kinahan said.

“The U.S. equity market is still the best game in terms of safety versus opportunity. But there is a shift going on.”

The scale of the recent Treasury sell-off prompted Australia’s central bank to launch a surprise bond-buying operation to try to stanch the bleeding.

MSCI’s benchmark for global equity markets slid 1.61% to 656.29 despite its large weighting to the U.S. tech heavyweights.

In Europe, the broad FTSEurofirst 300 index closed down 1.64% at 1,559.48. Technology stocks lost the most as they continued to retreat from 20-year highs.

The dollar rose against most major currencies as U.S. government bond yields held near one-year highs and riskier currencies such as the Aussie dollar weakened.

The dollar index rose 0.683%, with the euro down 0.9% to $1.2066. The Japanese yen weakened 0.31% versus the greenback at 106.55 per dollar.

Gold fell more than 2% to an eight-month low, as the stronger dollar and rising Treasury yields hammered bullion and helped it post its worst month since November 2016.

U.S. gold futures settled 2.6% lower at $1,728.80 an ounce.

Benchmark German government bond yields fell for the first time in three sessions but were still headed for their biggest monthly jump in three years after rising inflation expectations triggered a sell-off.

The 10-year German bund note fell 1.2 basis points to -0.271%.

European Central Bank executive board member Isabel Schnabel reiterated on Friday that changes in nominal interest rates had to be monitored closely.

Copper recoiled after touching successive multi-year peaks in six consecutive sessions, falling more than 3% as risk-off sentiment hit wider financial markets after a spike in bond yields.

Three-month copper on the London Metal Exchange (LME) slumped to $9,112 a tonne.

MSCI’s emerging markets equity index slumped 3.36%, its biggest daily drop since markets plunged in March.

The surge in Treasury yields caused ructions in emerging markets, which feared the better returns on offer in the United States might attract funds away.

Currencies favored for leveraged carry trades all suffered, including the Brazil real and Turkish lira, which slid for a fifth straight day, erasing all the year’s gains.

The heaviest selling earlier was in Asia, with MSCI’s broadest index of Asia-Pacific shares outside Japan sliding more than 3% to a one-month low, its steepest one-day percentage loss since the market rout in late March.

Oil fell. Brent crude futures settled down 75 cents at $66.13 a barrel. U.S. crude futures fell $2.03 to settle at $61.50 a barrel.

(Reporting by Herbert Lash in New York; Additional reporting by Tom Arnold in London, Wayne Cole and Swati Pandey in Sydney; Editing by Nick Zieminski and Matthew Lewis)

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Dollar gains on higher yields, risky currencies weaken

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Dollar gains on higher yields, risky currencies weaken 2

By Karen Brettell

NEW YORK (Reuters) – The U.S. dollar gained on Friday as U.S. government bond yields held near one-year highs, while riskier currencies such as the Aussie dollar weakened.

Yields have surged as an acceleration in the pace of vaccinations globally and optimism over improving global growth bolster bets that inflation will rise. That has also led investors to price in earlier monetary tightening than the Federal Reserve and other central banks have signaled.

The dollar move is “a function of what’s happening on the yields side,” said Jeremy Stretch, head of G10 FX strategy at CIBC World Markets. The 10-year yield briefly climbed above the S&P 500 dividend yield on Thursday, he noted, indicating “uncertainty that is writ large.”

The dollar index rose 0.59% to 90.847, its highest level in a week.

It gained against the yen, touching 106.69 for the first time since September.

The benchmark 10-year Treasury yield surged above 1.6% on Thursday for the first time in a year after a weak seven-year note auction. It was last at 1.45%.

U.S. yield increases have accelerated this month as Fed officials refrain from expressing concern about the yield gains.

“The Fed has not really hinted that that’s making them uncomfortable, so the bond market’s going to push that,” said Edward Moya, senior market analyst at OANDA in New York. “That’s really dictating this move in the dollar.”

Riskier currencies retreated. The Aussie fell 1.99% to $0.7713, after topping $0.80 on Thursday for the first time since February of 2018.

Marshall Gittler, head of research at BDSwiss, said the Australian dollar was underperforming despite the market signaling higher growth, likely because the country’s central bank’s yield curve control policy would restrain its bond yields from moving much higher. That, in turn, could limit the attractiveness of the currency.

The greenback is likely to continue to benefit from safe- haven flows if risk appetite continues to worsen, and emerging market currencies may be among the biggest losers.

“There’s a big, big concern that this reflation risk is going to get out of hand and that’s going to really pummel the emerging market currencies, and I think you’re going to see that investors are going to need to reassess their dollar positions,” said Moya.

Data on Friday showed U.S. consumer spending increased by the most in seven months in January, while price pressures were muted.

U.S. jobs data for February released next Friday is the next major economic focus.

Investors are also waiting on details of the U.S. fiscal stimulus bill, which is expected to be passed in the coming weeks.

The Democratic-controlled House of Representatives on Friday was poised to push through President Joe Biden’s $1.9 trillion coronavirus aid package, although it looked unlikely to be able to use the bill to raise the minimum wage nationwide.

The euro dipped 0.79% to $1.2078 after touching a seven-week high of $1.2244 on Thursday.

Bitcoin fell 0.32% to $46,946. Ethereum dropped 0.7% to $1,468.

(Additional reporting by Ritvik Carvalho in London; Editing by Dan Grebler and Andrea Ricci)

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Oil drops on dollar strength and OPEC+ supply expectations

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Oil drops on dollar strength and OPEC+ supply expectations 3

By Jessica Resnick-Ault

NEW YORK (Reuters) – Oil prices fell on Friday as the U.S. dollar rose while forecasts called for crude supply to rise in response to prices climbing above pre-pandemic levels.

Brent crude futures for April, which expire on Friday, fell 74 cents, or 1.1%, to $66.14 a barrel by 12:45 EDT (17:45 GMT). The more actively traded May contract slipped by $1.08 to $65.03.

U.S. West Texas Intermediate (WTI) crude futures dropped $1.42, or 2.2%, to $62.11. The contract was still on track to be up 4.8% on the week.

The U.S. dollar rose as U.S. government bond yields held near one-year highs, making dollar-priced oil more expensive for holders of other currencies.

“It’s a dicey time – it doesn’t seem like a time to load up on a risk-asset position,” said Bob Yawger, director of Energy Futures at Mizuho in New York, wary of a potential output increase from OPEC and allies at next week’s meeting. Also, the U.S. stockpile report this week showed a surprise build in oil inventories.

Friday’s gains also reflect profit-taking after both Brent and WTI headed towards monthly gains of about 20% on supply disruptions in the United States and optimism over demand recovery on the back of COVID-19 vaccination programmes.

Investors are betting that next week’s meeting of the Organization of the Petroleum Exporting Countries (OPEC) and allies, a group known as OPEC+, will result in more supply returning to the market.

U.S. crude production fell in December, the latest month for which data is available, according to a monthly report from the Energy Information Administration.

Despite talk of tightening fundamentals, the demand side of the market is nowhere near warranting current oil price leves, they added.

U.S. crude prices also face pressure from slower refinery demand after several Gulf Coast facilities were shuttered during the winter storm last week.

Refining capacity of about 4 million barrels per day (bpd) remains shut and it could take until March 5 for all capacity to resume, though there is risk of delays, analysts at J.P. Morgan said in a note this week.

(Reporting by Shadia Nasralla, Additional reporting by Sonali Paul in Melbourne and Koustav Samanta in Singapore; Editing by David Goodman, Louise Heavens and David Gregorio)

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