US: Trump’s protectionist talk ramps up the odds of a global trade war - ING

According to Viraj Patel, Research Analyst at ING, developments on US trade policy will be the primary focus for global markets this week, with President Trump’s administration set to formally announce tariffs on US imports of steel and aluminium this week.

Key Quotes

“The initial reaction from international investors will depend on (a) the details of the tariff policies – and whether some countries will be exempt and (b) the propensity for major trading partners to impose retaliatory protectionist measures on the US. Judging by the noise coming out of the White House this weekend – any country exemptions are not on the table ‘at this point in time’ (quoting Trump’s trade adviser Peter Navarro).”

“Add to this the President’s tweeted comment last Friday that “trade wars are good and easy to win” – and the already strong countervailing threats made by the likes of the EU and Canada (less so China) – and the risks of some sort of ‘global trade war’ taking place has certainly increased. Global financial markets seem relatively underprepared for this scenario – not least as asset prices have largely been pricing in the narrative of synchronised global growth over the past couple of months.”

“Any shift towards a global trade war would see  our central assumption over the state of the global economy moving away from a positive reflationary story to a negative stagflationary – rising cost-push inflation and lower global growth – backdrop. For currency markets, ‘America First’ policies in our view equates to ‘Dollar Last’ – with the USD pricing in a greater US trade policy and political uncertainty premium in the run-up to the Nov midterms. Risks are that we see another 5-10% decline in the trade-weighted USD in 2018.”