Market report: Fears of global trade war rattle global markets
Susannah Streeter, head of money and markets, Hargreaves Lansdown: “Investors are rattled at the prospects of a full-blown trade war breaking out after the US slapped punishing tariffs on Canada, Mexico and China, prompting retaliation. Investors are buckling up for a rollercoaster ride for the global economy, with the European Union expected to be next in line for punitive duties. The FTSE 100 has been stopped in its tracks with the record run upwards going into reverse. It fell sharply in early trade amid worries that listed multinationals could be caught in the cross-fires of the trade wars. Japan’s Nikkei traded sharply lower, as investors assessed the repercussions for big corporates. European indices are also set for a rocky day of trading and Wall Street is set to open firmly in the red.
What was considered to be bluff and bluster from Trump has turned into cold hard reality. But President Trump is no longer the only one playing hardball. Canada’s outgoing Prime Minister Trudeau immediately imposed tit-for-tat 25% tariffs on $155bn in US imports. Mexico’s President has also ordered retaliatory action. These new aggressive actions on what used to be neighbouring allies, are the modus operandi of the new Trump administration, and part of not just trade policy but national security strategy. They’ve been imposed, not simply because of goods surpluses with the US, but over claims there’s been a lack surveillance on the borders enabling fentanyl to pass through and fuel the US opioid crisis. There is a glimmer of hope that a long-running dispute could be averted with a flurry of calls expected between Trump the leaders of Canada and Mexico, with China also counting on talks. But what’s clear is that Trump is way of doing business is to sow seeds of chaos and unpredictability to gain domestic political wins.
The fast-developing situation has re-ignited inflation concerns, given that tariffs are set to push up consumer prices. Canadians have already been warned they face tough times ahead, and even Trump has warned there may be some pain for Americans. While some costs may be able to be absorbed by importers and retailers, the burden is set to be passed onto customers in the form of higher prices which risks adding to inflationary pressures. Higher-for-longer rates in the US risk weighing on consumer sentiment and their purchasing power and ultimately effect economic growth. The dollar has surged in strength against a basket of currencies, as hopes for rate cuts from the Fed are reassessed once more. It’s highly likely that policymakers will stay highly cautious until it’s become clearer where the fallout will land in the US economy. While billions of dollars raised in tariffs might help put a dent in the US deficit, there’s a risk to American growth prospects ahead. The tariffs are likely to push up costs in the supply chain for US manufacturers, including big tech.
With the dollar flexing more muscle, there’s already a risk that inflation could be imported to other countries which are highly reliant on raw materials priced in dollars. While at an interest rate cut is still widely expected from the Bank of England this week, there is likely to be trepidation voiced among policymakers about the risks ahead from a global trade war. However, it could end up denting global growth prospects, and forcing big companies to reduce prices to stay competitive, which may end up increasing the chances of further rate cuts ahead.
The latest moves won’t do much to calm the high tensions which have hit the semi-conductor sector. Companies like Nvidia rely on the production of chips from outsourced factories overseas, like China and Mexico – but many other parts needed to construct AI data centres could also be vulnerable to tariffs, given they are imported. China is a huge source of electrical imports into the United States – with everything from video consoles to phones and phones potentially affected by tariffs.
Brent Crude has gained ground as traders assess the risks to the supply of oil on world markets. Canadian crude imports into the US will be slammed with a 10% tariff pushing up the costs for US refiners, while energy imports from Mexico will face a 25% tax. However, longer term the outlook for oil is clouded in fresh uncertainty. There may be downward pressure ahead as an escalating tariff war. encompassing more and more countries globally is likely to weigh on energy demand.”