New York • President Donald Trump (picture) said the US will never “surrender” in its economic rivalry with other nations. That’s keeping analysts on alert for signs of a trade war.
In his first State of the Union, Trump promised to “fix bad trade deals and negotiate new ones”. He refrained from naming specific nations or pacts, including the North American Free Trade Agreement (Nafta) that the US is renegotiating with Mexico and Canada. But only last week, the president slapped tariffs on solar panels and washing machines, and the White House hinted on Tuesday that it still may punish China for allegedly flouting US intellectual property.
Trump’s less hawkish tone in the State of the Union is the latest shift in the president’s rhetoric on trade, which has veered between apocalyptic and reassuring. In an interview last week, the president said: “I may terminate Nafta. I may not.” He earlier told farmers that his team is working hard to get a better deal.
Amid the uncertainty, a slew of analysts have said the risk of a trade war is elevated and recommend preparing now.
“He’s been more volatile on trade than any president in my memory,” said Phil Levy, senior fellow on the global economy at the Chicago Council on Global Affairs. “There’s one stance one day, and another the next.”
In an interview last week, Trump said he would be open to re-entering the Trans-Pacific Partnership, after withdrawing the US from the Asia-Pacific trade deal shortly after taking office. “With any other president, you’d have the US trade representative coming out pretty soon with the action plan,” said Levy, who was senior economist for trade on George W Bush’s Council of Economic Advisers. “Here’s it’s just sort of tossed out.”
One of the main areas ripe for problems if trade issues become more severe is developing countries that are heavily reliant on trade — Mexico being a prime example. Goldman Sachs Group Inc has cautions on Russell 1000 Index stocks with heavy exposure to that country, while Morgan Stanley recommends shorting the Mexican peso.
ABN Amro Bank NV points to potential trouble for other economies, flagging Hong Kong, Singapore, Malaysia, Thailand and South Korea as “particularly vulnerable” because they have relatively big export linkages with the US.
“As global trading hubs, Hong Kong and Singapore are in any case vulnerable to a serious rise in protectionism,” ABN Amro senior economist Arjen van Dijkhuizen wrote in a note on Monday.
There are more potential US equity plays as well. Morgan Stanley strategists led by Michael Zezas wrote in a note on Jan 22 before the tariffs were implemented that expectations of trade issues would favour defensive industries over cyclical ones and that sectors like apparel and semiconductors risked being hurt by supply-chain disruption.
US autos face the largest risk from Nafta withdrawal, according to Goldman strategists led by David Kostin, writing in a note last Friday. “Concerned investors should focus on US stocks with the most domestic exposure,” they said.
In foreign exchange, in addition to the short Mexican peso recommendation, Morgan Stanley suggested shorting the Canadian dollar, as well as going long on the Japanese yen versus the Korean won “to hedge against protectionist risks, given yen’s negative correlation to risk and the sensitivity of won to trade”.
The analysts still see real economic or market impact from trade disputes as a lowprobability event.
In the State of the Union, Trump “didn’t take a lot of time to hammer the negative message, he accentuated the positive” said Evercore ISI analyst Terry Haines in an interview on Wednesday. Market concerns about Trump’s trade policy is unlikely to go away, but “they’re trying to adopt a layered message here”.
“The risks have increased,” last Friday note from Barclays plc said, but “we remain optimistic that US action and potential retaliation remain contained”. ABN Amro agreed, saying its base scenario doesn’t include a major trade war, while Goldman asserted that the Nafta negotiations pose only a “minor risk” to the S&P 500.
And Morgan Stanley’s strategists said a full “protectionist push” would be required to initiate a broader risk-off move.
Yet, those analysts still recommend preparing for the possibility that trade tensions will escalate. — Bloomberg