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What has happened
There is only one story dominating investors’ minds as we kick off a new month – US President Trump’s trade tariffs of up to 25% on goods from Canada and Mexico and up to 10% of additional tariffs on China which were announced over the weekend (though Canada’s energy exports into the US are set at a lower 10% tariff). Within hours of Trump’s tariff announcement, Canada announced retaliatory tariffs of 25%, while Mexico has indicated it would also introduce tariffs with details expected later today – China’s response meanwhile is unclear, though officials there have said that they would “take necessary countermeasures to defend [China’s] rights and interests”. With these US trade tariffs due to start tomorrow, it leaves little time for any last-chance negotiations. Adding to the high-stakes pressure, Trump’s tariffs also include a built-in tariff ratchet-option where should a country retaliate “the President may increase or expand in scope the duties imposed”. The European Union (EU) meanwhile remains in the tariff crosshairs, with the US President saying over the weekend that tariffs against the EU “will definitely happen” and “it’s going to be pretty soon.”
What to look out for this week, besides US Trump’s tariffs
Normally, this week’s economic news calendar would be the focus for markets, with the latest US monthly jobs ‘non-farm payrolls’ data for January that is due to come out on Friday taking top-billing. Ahead of that, the Bank of England’s latest interest rate policy decision is due on Thursday (where a 25 basis point cut is expected, which if it happens would take UK interest rates down to 4.5%), while company results due out this week include megacap technology companies Alphabet (Google’s parent company) on Tuesday, and Amazon on Thursday. But this is not a normal week – instead, given US President Trump’s trade tariffs announced at the weekend, all eyes will instead now be watching for any further tariff developments this week while hoping that there might yet be a deal done to avoid them.
The fall-out from Trump’s tariffs
Following a relatively hawkish US Federal Reserve meeting last week that showed they were in no mood to rush to cut interest rates, also feeding a stronger US dollar narrative currently are Trump’s latest tariffs which are due to start tomorrow. Collectively a stronger US dollar has already been weighing on emerging markets - Bloomberg news over the weekend cited close to a US$1billion worth of emerging market local currency bond fund outflows during January alone. The broader narrative risk of higher tariffs is also concerning for export-dependent economies across emerging markets – perhaps not surprisingly, emerging market equities (which Brooks Macdonald’s asset allocation has a negative outlook on), has underperformed developed market equities so far this year, building on last year’s relative underperformance too.
What does Brooks Macdonald think
The US$ value of imports potentially affected by Trump’s tariffs over the weekend is significant - Canada, Mexico and China together make up around 40% of imported US goods, and equates to around US$1.35 trillion worth of trade – to put that in perspective, that is not far off around four times the size of the $350bn of Chinese goods that Trump hit with tariffs during his first presidential term – the overall impact (if the tariffs stick and assuming no change to global trade routes) would take the average duty rate on US imports up from around 2.3% previously to around 10%. As a result, markets are likely to take seriously the risk of inflationary pressures on account of the higher tariff-induced prices. All in all – this tariff news challenges earlier investor hopes that US President Trump would only use such measures as a threat rather than as an actual implemented policy tool – while there is still time for a deal to be done, for markets, tariff risks were not fully priced in, so some recalibration is now going to be needed.
Source: Brooks Macdonald
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Brooks Macdonald is a trading name of Brooks Macdonald Group plc used by various companies in the Brooks Macdonald group of companies. Trading companies within the Group: Brooks Macdonald Financial Consulting Limited (company number 2621847); Brooks Macdonald Asset Management Limited (company number 3417519); Brooks Macdonald Funds Limited (company number 5730097); Brooks Macdonald Asset Management (International) Limited (company number 143275); Levitas Investment Management Services Limited (company number 07692055); and Cornelian Asset Managers Limited (company number SC113646).
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