Market Watch

It’s the final week of the month and the quarter this week, and if the first quarter of 2018 has disclosed anything it’s that the fears around a Trump presidency back in November 2016 have finally and firmly arrived.

The initial fiscal policies of the President in substantial tax cuts, infrastructure spending and increasing federal borrowings for ‘other’ stimulus measures have been championed by US markets and global ones for that matter. However, Trump’s 2016 campaign was rooted in ‘fairness’ and ‘America first’, meaning protectionism was always going to be a cornerstone of Trump admiration.

Firstly, if you are unaware of who Peter Navarro and Robert Lighthizer are, please go and look them up. These two men now control the Trump administration’s direction on all things economic. Having seen the loss of Gary Cohn (he was the 56^th person to leave the administration since taking over on the 20^th of January 2017 – that figure currently stands at 60) as Trump’s senior economic adviser two weeks ago, there are now no ‘free market’ champions in the economic inner-circle. This has seen the administration lurch heavily into the protectionist camp.

To give an example of why these men are a key risk to markets, Navarro has written several papers and books around the ‘disaster’ that US trade policy has been. He is credited with one of the largest protectionist lines in the US currently: ‘Death by China’.

Is it any wonder that on Friday it was announced that $US60 billion worth of tariffs are to be placed on Chinese goods due to intellectual property (IP) ‘theft’ of American hi-tech manufacturing and services. This is just the beginning of trade tariffs, not the end.

The tit-for-tat has already started with China responding in kind for being singled out, slapping $US3 billion worth of import tariffs on a wide range of US products including steel, farming products and wine.

Having Australia’s largest defence partner and largest export partner muscling up to each other will put Canberra in a bind and just adds an investment dampener to this country considering Australia is seen as a quasi-China trade.

However, it isn’t the IP tariffs that make me sit up and wonder how deep and far this will go, it’s the rumoured manufacturing tariffs that are currently being prepared.

Targeting manufacturing will take the trade wars to a new level, as it not just Asia that Washington is preparing to move against. It also includes Europe and the tariffs will most likely be framed around car manufacturing.

This would be squarely aimed at Germany – Trump has form here, having already caused BMW and Daimler to cancel plans to shift manufacturing plants from the US to Mexico due to threats of tariffs and other protections measures.

Hitting Europe with manufacturing tariffs will be a mass hit to global GDP. Europe’s bounce out of its low growth environment is why most see 2018 as the peak of the synchronised global growth story.

Trade wars are “kryptonite” to growth and lead to trade policies that not only crimp global growth but to domestic short comings. Consumption slows as price inflation picks up in the targeted area (think discretionary products that have consolidated to be competitive i.e. white goods), business slows and even forces them to leave nations as tariffs impact operations. This will lead to employment concerns.

The list as to why trade wars are poor policy positions is endless, yet here we stand.

The US market is already exhibiting its displeasure at the latest round of cuts; having its worst day since February 8 on Thursday night and falling further still on Friday night. Volatility is on the up again and is likely to remain unabated in its upward trajectory as trade actions ramp up between Beijing and Washington.

2018 was the year growth would carry markets to new post-GFC highs; the current global GDP actuals is attesting to this.

However, geopolitics is now the largest macro-risk impacting the growth outlook and with the White House remaining on its current path it will be the largest risk for the foreseeable future for both growth and global markets.