Weekly Recap: Prospects Of A Trade War Rattles The Markets

Last year, amidst the global markets rally, market participants kept on throwing the caution of a trade war. As the year went on, the volatility went to the lowest level in decades. Traders expected Trump to change his mind about his protectionist policies to save the market rally he had praised since his election.

These hopes dimed yesterday when the president announced that he would initiate new tariffs on imported steel and aluminum. This was possibly the biggest news of the week in terms of its magnitude and effects to the global order.

Imposing tariffs on these commodities will lead to other countries and regions to respond which could see a new wave of trade war. While the tariffs are aimed at China, the country’s steel and aluminum exports to the United States are miniscule. On the other hand, China is America’s largest importer of Soy Beans, which are mostly planted in the Trump country. If China imposes tariffs on these products, it will be extremely difficult for American farmers to compete.

In addition, the new tariffs will come a few months after Trump signed in the tax reform package. The tax package was intended to remove burden for companies and individuals. The new tariffs will in fact be a new tax to American businesses and individuals. In short, only American steel and aluminum companies will benefit.

The second major news during the week came from the new Fed chair. In a testimony to congress on Tuesday, Powell sounded more optimistic about the country’s economy and caught traders off guard when he projected four more rate hikes this year. This was a major news because traders expected the Fed to hike three times. As a result, the statement pushed the dollar higher among the major currencies. In addition, the Q4 GDP numbers disappointed yesterday while the jobless claims fell to the lowest level in decades. For the week, the dollar index is up more than 50 basis points.

In Europe, the debate about Brexit continued. On Wednesday, a draft document created by the EU stated that the bloc will continue recognizing Northern Ireland as part of the EU. This was an unacceptable pledge, which caused ire in the United Kingdom. On Thursday, the European parliament voted against proposals by the UK about EU migrants to the UK. As a result of all these issues, the pound fell against the major currencies. For the week, it was down more than 1% against the dollar.