The recent long list of tariffs the Trump administration implemented on its trading partners is now revealing itself as a policy that will slow down trade across the globe.
Everything from steel and aluminum, to milk and produce, to automobiles and tech firms are under attack. In Canada, a 25 per cent tariff on steel and a 10 per cent tariff on aluminum is already in place.
Global markets lower
Over the past week, markets have reacted badly to the tariffs in what experts are calling U.S. President Donald Trump’s “America first” agenda. Tech stocks around the globe fell, on reports that the U.S. Treasury Department is working on restrictions that would block companies with at least 25 per cent Chinese ownership from buying U.S. tech companies.
After the news, Treasury Secretary Steven Mnuchin tweeted that the curbs would apply “to all countries that are trying to steal our technology,” not just China. And this is not sitting well with investors in the IT sector. The NASDAQ has seen a decline, particularly in its some of its “FAANG” stock – Facebook, Amazon, Apple, Netflix and Google (now Alphabet.) However, Apple did not show as steep declines as the others.
Chinese markets have also seen declines and the benchmark Shanghai Composite Index is now in bear territory. Investors are anticipating the biggest drop in market value since 2015.
Back home, stocks on the Toronto Stock Exchange continue to suffer, as trade tensions between the U.S. and Canada remain and talks to renegotiate NAFTA are going slower than expected. Stocks in IT, health care, and consumer discretion were all declining by mid-week.
Experts are worried
Financial analyst Michael Farr told CNBC recently that, “There is a new cloud of fear. Will it last? We haven’t seen any one of these downward sort of trends take over yet.”
New research conducted by Absolute Strategy Research found that expectations of an improvement in global business confidence had declined sharply since the start of the year. The quarterly study surveyed 214 asset allocators who manage $4.1tn of funds. Speaking to the Financial Times, head of ABR David Bowers, says investors are losing faith in the global economic upswing.
But in what may be the most concerning part, some U.S. market experts are seemingly unware of how the U.S. is treating its trading partners. Recently BMO chief economist Doug Porter, told The Globe and Mail that Americans are not that concerned about a global trade war, and, in a sense, Canadian economic growth is just collateral damage in their perspective.
Porter said “I was on a panel recently with a very senior economist at a big U.S. bank, and found myself explaining to said individual (patiently, of course) that, yes, the U.S. was already imposing tariffs on Canadian (and EU and Mexican) steel and aluminum, and that, no, it’s not all bluster. The point is someone who should probably know this, didn’t.”
The future of interest rates
While most predicted the Bank of Canada to raise rates twice in 2018, that is now under threat as trade tensions rise.
Bank of Canada Governor Stephen Poloz recently spoke in Victoria, British Columbia regarding current economic data, and his speech was closely watched as there is an interest rate decision coming up in two weeks.
In reviewing his speech, TD Economics said Governor Poloz was a bit on the cagey side. Coming on the heels of generally disappointing April data, the focus on data dependence and references to the impact of trade policies and housing developments are clearly dovish signals. At the same time, TD Economics says Poloz’s “statement that “Financial markets understood our message” is in reference to a statement that drove market odds of a July rate hike from 60% to 80% in a single day.”
The repots adds, that current risks around trade and housing/debt will factor into the Bank’s decision-making is a given. Developments since Deputy Governor Lane’s speech (which fell on the same day as the announcement of U.S. steel and aluminum tariffs, and after the hawkish May statement) have certainly been less than encouraging.
Trade tensions could keep markets volatile and rates lower in Canada. For everyday investors and those with mortgages, these developments are important. Yes, your cost of borrowing may not go up, but higher inflation could mean that everyday items will start to cost more. With increased pressure on business with new tariffs, even everyday items like groceries and cars could mean Canadians will soon fork out more to buy less.