Markets Rebound as Republicans Oppose Trump Tariffs Plan
Investors may have been rattled by the prospect of a trade war after Donald Trump’s recent tariffs announcement, but equity markets are once again recovering as it becomes clear that the US President does not have the full backing of his party of this one.
Some Republicans, including House Speaker Paul Ryan, have warned against starting a trade war that could damage the economy and undo the benefits of the recently passed tax reforms, highlighting that Trump is lacking the full support of his party on this particular issue. Trump’s comments linking the tariffs to NAFTA negotiations also suggested that they could be dropped if a new agreement is signed, suggesting he may simply be using the threat of tariffs to put pressure on others to deliver what he considers to be fair and reciprocal trade.
That may enable Trump to extract some concessions from Mexico and Canada, or at least allow him to claim credit for securing a better deal, but it’s unlikely to work as well with the European Union and China, among others. The prospect of a trade war will be a big concern for markets, with many of the view that such action would drive up prices for all and weigh on economic growth.
European Markets Unfazed By Italian Result, For Now
While markets are rebounding, US indices are still more than 5% off their highs having gone through an unusual rough patch over the last month or so, while some in Europe are faring even worse. The German DAX is almost 10% below its January highs, with the long drawn out negotiations not helping matters, although this did come to an end this weekend with the SPD voting to join a grand coalition again. The prospect of tighter monetary policy may also be weighing on European markets at a time when the euro area economy is gathering some momentum.
The Italian election weighed heavily on the FTSE MIB heading into the weekend and at the start of the week, although we have seen a strong rebound over the last 24 hours. The strong performance of populist euroskeptic movements in Italy and corresponding underperformance of the established parties will be a concern to those hoping for political stability and a pro-EU government. It will also cause a major headache for the rest of the EUs desire for an ever-closer union in the unlikely event that the two main populist parties go into coalition.
At the moment the impact on the wider market has been minimal, which may reflect the change in tone from euroskeptics from demanding a referendum on membership to simply criticizing the project and opposing a closer union. While this stance could revert once in power, especially in the case that the euroskeptic parties go into coalition, at the moment the risk of a referendum and vote to leave is still slim. The greater issue is prolonged political instability and weak growth.
Central Bank Speakers Stand Out in Quiet Session
While today is looking a little quieter in terms of major economic events, particularly when compared to the rest of the week, there are a few central bankers making appearances which will be of interest. These include Lael Brainard from the Federal Reserve, Andy Haldane from the Bank of England and Governor Philip Lowe from the Reserve Bank of Australia.