This week has been a reminder of the rollercoaster in news flow that financial markets are set to experience under four more years of Donald Trump
On one hand, good news with the appointment of a market friendly Treasury Secretary in Scott Bessent. On the other, a social networking post by Trump promising significant tariffs on three major trading partners responsible for over $1.5 trillion of trade. Much like Trump’s first term in office, we now need to figure out if this is definitive policy or just a starting point for negotiations…
At the end of last week, President elect Trump nominated head fund manager Scott Bessent to be Treasury Secretary. The reaction was positive – Bessent is viewed as an experienced individual and his appointment was seen to be a helpful counterbalance against the incoming President’s more extreme impulses around tariffs and economic policy. Bessent has consistently argued for reducing the federal budget deficit and told the Wall Street Journal his priorities would be cutting spending, enacting tax cuts and introducing tariffs. On tariff’s, Bessent said “Used strategically, tariffs can increase revenue to the Treasury, encourage businesses to restore production and reduce our reliance on industrial production from strategic rivals. “For too long, the conventional wisdom has rejected the use of tariffs as a tool of both economic and foreign policy. However, like Alexander Hamilton [the first ever Treasury Secretary], we should not be afraid to use the power of tariffs to improve the livelihoods of American families and businesses.” Bessent is known to be a fan of the late Japanese Prime Minister Shinzo Abe’s ‘three arrows’ approach – in Bessent’s view for this the US this means cutting the deficit to 3%, hitting a growth rate of 3% and increasing oil production by 3 million barrels a day.
The week therefore started with some cautious optimism thanks to the news over Scott Bessent’s appointment, but this was somewhat undone by President-elect Trump’s post on his ‘Truth Social’ network on Monday evening that one of his first executive orders when he takes office on 20 January will be to charge Mexico and Canada a 25% tariff on “on ALL products coming into the United States and its ridiculous open borders”. Trump accused the countries of permitting illegal immigration and drug trafficking, claiming claimed “thousands of people are pouring through Mexico and Canada, bringing Crime and Drugs at levels never seen before”. Trump also promised an immediate 10% tariff on top of existing tariffs on all imports from China. These tariffs would cover 40% of total US trade. Unsurprisingly, the Canadian Dollar and Mexican Peso both weakened significantly. The question all investors need to ask, now and for the next four years is whether to take Trump’s comments literally – is this an opening gambit for negotiation or a firm policy commitment? If it is the latter, it will have the potential to undermine what was formerly called the North American Free Trade Agreement (NAFTA) and was substituted by the USMCA (US-Mexico-Canada Agreement) which was negotiated under the previous Trump administration.
Adding in China to Canada and Mexico, the total value of goods imported into the US from these three countries was almost $1.5 trillion in 2022. The biggest import from Canada was crude oil, valued at $117 billion and making up 60% of US oil imports. From Mexico, the US imported $37 billion of computers and $34bn of cars in 2022. While it is too soon to accurately predict the impact of these tariffs, the potential significant upside risks to inflation are obvious should they be implemented. With this announcement, Trump has made it clear very quickly that he intends to use tariffs as a diplomatic weapon in response to issues not related to trade, in this case immigration and drug trafficking. Inevitably we have seen immediate pushback, with Canadian Prime Minister Justin Trudeau phoning Trump while Mexican President Claudia Sheinbaum hinted at retaliation. Sheinbaum wrote to and spoke with Trump, noting “the phenomenon of migration or the consumption of drugs in the United States will not be dealt with by threats or with tariffs. One tariff will come in response to another, and so on until we put shared companies at risk”. A spokesman for the Chinese Embassy in the US told media “no-one will win a trade war or a tariff war.” Trump has made it clear very swiftly that the appointment of a ‘business as usual’ Treasury Secretary will not stop him from using tariffs aggressively to achieve his policy goals.
In terms of economic data, the flash PMI data was a mixed bag, with the US economy appearing robust, led by the services sector which was much stronger than expected. In contrast, the data for the eurozone remained in contraction, with a notable weakening in the services sector. The UK also showed a notable deterioration, with business confidence apparently dented by the recent Budget. The composite figure for the UK was in contraction for the first time since last October.
The fallout from the UK budget and weak business confidence continues to dominate the political and economic agenda in the UK. Chancellor Rachel Reeves attempted to boost business sentiment when addressing the CBI annual conference this week, telling the conference there will be no more tax increases on British businesses, and insisting there was no alternative to the £40 billion of tax increases in last month’s Budget. Reeves said, “we’ve now set the budget for public services for the duration of this Parliament… public services now need to live within their means because I’m really clear I’m not coming back with more borrowing or more taxes”. Such a promise may well come back to haunt the Chancellor, and indeed the comment was subsequently ‘clarified’ by the Treasury, who said her comments “had not completely excluded the possibility of future tax rises”. The government has backed itself into a corner with very little fiscal headroom having added business taxes to the list of potential taxation streams that will no longer be touched. This comes having previously ruled out increases to the big four taxes responsible for 75% of taxation income – income tax, national insurance, VAT and corporation tax – ahead of the budget. The Labour government’s landslide win back in July feels very distant already.
In what is an increasingly uncertain world, there was some positive geopolitical news this week with Israel and Hezbollah agreeing an initial ceasefire deal to pause the war in Lebanon. The deal, brokered by the US and France, was described by President Biden as a pathway to a permanent deal. Biden said, “under the deal . . . the fighting across the Lebanese-Israeli border will end. This is designed to be a permanent cessation of hostilities.” Under the terms of the deal, Hezbollah will be barred from rebuilding infrastructure in the south of Lebanon and Israeli forces will gradually withdraw from Lebanon over the next two months. There remains the issue of the ongoing conflict between Israel and Hamas in Gaza, but the lack of further escalation between Israel and Iran and news of a ceasefire in Lebanon should be seen as positive progress towards a slightly more benign backdrop in the Middle East.
Source: Bloomberg as at 29 November 2024
