Winners And Losers In Markets At The Start Of What Could Be A Global Trade War
By James Picerno | The Milwaukee Company | jpicerno@themilwaukeecompany.com
The rollout of US tariffs on its major trading partners has created a mix of winners and losers in the financial markets today.
Markets are trying to price in a changing risk outlook on multiple dimensions, including expectations for economic activity, inflation and consumer spending.
No change is expected for the Federal Reserve’s target interest rate at the next policy meeting, but Fed funds futures are leaning into a possibility for a cut in May.
Financial markets no longer have to guess if President Trump’s plans for import tariffs are a negotiating tactic. Starting today, the US imposed 25% taxes on imports from Canada and Mexico and raised tariffs on China to 20% from 10%. Canada and China have announced retaliatory measures, and Mexico says it will do so soon.
The three countries are the biggest trading partners with the US (in terms of individual nations) and collectively represent 40%-plus of America’s imports. The three markets are also leading destinations for US exports, topped only by the multi-country European Union bloc, which wasn’t targeted in today’s round of tariffs.
The risk of a global trade war, in short, appears to have increased, with implications for economic activity, inflation and consumer demand. A key question is whether this marks the start of an even wider run of tariffs that spreads? Trump has recently said that he’s considering charging higher taxes on imports from Europe.
Markets, of course, are reacting, including investor bets on interest rate decisions by the Federal Reserve. Fed funds futures this afternoon are still pricing in a high probability that the central bank will leave rates unchanged at the next policy meeting on Mar. 19. Meanwhile, estimates for a rate cut at the May 7 meeting have increased to a roughly 47% probability, according to the CME Group.
The catalyst for rate cuts, presumably, is concern that economic growth could suffer from a protracted trade war. It appears that markets are now elevating the threat of slower growth (or even recession, according to some forecasters) as the Fed’s primary focus rather than inflation.
These are early days and so uncertainty is high about the effects on inflation and the economy. Financial markets are struggling to price in where we go from here, including the main questions: How long will a tariff war last and how far will it spread?
Meanwhile, here’s a brief review of how markets are reacting initially, using a set of ETFs. Note that all results are based on late-day trading (roughly 3:00 pm eastern) on Tues., Mar. 4.
US Inflation Indexed Treasuries: the potential for higher inflation via tariffs has been a factor driving inflation-indexed Treasuries higher recently. In today’s trading, the iShares TIPS Bond ETF (TIP) rallied before pulling back later in the session.
US Treasuries: standard government bonds also rallied briefly today, extending the recent upswing. The allure of Treasuries as safe-haven assets continues to have appeal in the current climate.
US stock market: equities have taken a hit, based on the SPDR S&P 500 ETF (SPY). Small-cap shares, which have been underperforming the broad market this year, are taking an even deeper loss, based on the iShares Core S&P Small Cap ETF (IJR).
Equity Sectors: Reviewing US stocks on a sector basis reflects a wide array of results. Consumer Staples (XLP), for example, are exhibiting relative strength in terms of the recent trend, presumably on the assumption that any negative economic effects from a trade war will be muted to a degree for demand of essential products, such as food and personal care items. Healthcare (XLV) and utilities (XLU) are also relatively resilient. By contrast, financials (XLF), consumer discretionary (XLY) and industrials (XLI) are posting the biggest sector losses today.
Gold: This precious metal (GLD) is living up to its safe-haven status today, rallying for a second day and closing in on a record high that was set just over a week ago.
Bitcoin: the most popular cryptocurrency is relatively stable today and appears to be consolidating after a recent selloff, based on iShares Bitcoin Trust (IBIT).
Real estate: Property shares (XLRE) are still holding on to this year’s rally, despite a moderate pullback today.
Commodities: A broad measure of commodities (GSG) remains on the defensive, but is showing a bit of strength today. As a benchmark for global economic activity, the price of commodities overall will likely be a useful tracker for monitoring sentiment for the macro outlook as it relates to potential repercussions from higher trade tariffs.
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