Why trade tensions will keep investors on their toes
Author: Kevin McCreadie
July 13, 2018
Stock markets could grind higher following a first half marked by increased volatility and mixed performance on major indices around the world, but the extent of future gains will be determined by the potential impact of escalating tensions between the United States and its key trading partners on the global economy.
This is particularly true when it comes to the growing dispute between the U.S. and China. While the global economy should easily absorb the US$34 billion in tit-for-tat tariffs so far imposed by both countries, the stakes continue to ratchet higher with U.S. President Donald Trump now warning of additional levies on Chinese imports totaling US$200 billion.
This latest threat isn’t surprising given Trump’s history of antagonism and may end up being nothing more than a tactical ploy, resulting in a negotiated settlement that includes a commitment to reduce the U.S. trade deficit with China. The U.S. President would likely view even a partial reduction in the deficit a victory, which could be accomplished several ways including an increase in the amount of U.S. oil bought by China.
In this scenario, equity markets probably climb higher with periods of volatility depending on the tone of negotiations moving forward and how long it takes to get a deal done. But if negotiations go completely off the rails, and current threats become reality, then chances of an economic slowdown will increase significantly and an extended pullback in stocks should be expected.
To further complicate matters, investors must also contend with a brewing U.S. vs European Union trade spat and ongoing uncertainty surrounding the North American Free Trade Agreement (NAFTA).
Talks to revamp the accord between Canada, the U.S. and Mexico have stalled in recent months and may get more difficult following the recent Mexican elections – especially from a Canadian perspective.
Mexican President-elect Andres Manuel Lopez Obrador wants to see workers in his country get paid more money and may find common ground in negotiations with Trump who believes Mexican wages are too low for U.S. manufacturers to compete. If so, that may force Canada back to the negotiating table with fewer bargaining chips to strike the kind of fair deal it seeks.
Taken all together, global trade tensions represent a growing risk and will continue to play a big role in the direction of equity markets over the next six months. For now, economic growth remains solid and should help push stocks higher, but investors need to be on their toes. A turn for the worse in any of the negotiations between the U.S. and its allies could quickly turn gains into losses.
Kevin McCreadie is president and chief investment officer at AGF Investments Inc. He is a frequent contributor to the AGF Perspectives blog.