Someone forgot to slip Trump that Bex we talked about yesterday because today the tariffs were announced and to quote the ECB President Mario Draghi “if you put tariffs against your allies, one wonders who your enemies are”.

Peter Navarro, Trump’s nationalist hawk, certainly must feel any country that is not the U.S.A. is an enemy because that’s the way it all reads. Trump needs allies if he is to create trade concessions with China. Certainly, if he wants to reduce the imbalance by the stated $100 bio.   Instead, much of the rhetoric has been directed towards important allies. In particular Canada, the largest exporter of steel to the U.S., will be affected.  Not China.

China can sit back, smile, threaten retaliation. It knows all it has to do is nothing and wait for the U.S. to bleed. Certainly, the trade deficit gap is large but that also reflects in many ways the lack of savings and capital from elsewhere needed for investment.

This year, the debt held by the public is likely to rise from 74.3% of GDP to 90% by 2026.  And that does not include the recent changes caused by tax reform. Corporate debt stands at 45.3%of GDP and over the next few years companies will need to refinance at higher levels of interest rates.

The money released by the tax cuts is not going to R&D or capex, the necessary food for company longevity.  Instead, it is going into short term incentives such as M&A, share buy backs and increased dividends. M&A may be a positive, but as in any M&A activity there are winners and losers and often both lose. Apart from the banks, there are relatively few winners.

The deficit requires growth rates in excess of 3%.  But apart from the White House, there are not too many economists predicting growth rates exceeding 3%, which is a worrying sign in itself. And, then we add tariffs to the mix. No wonder Draghi is shaking his head.

According to Trade Partnership,  the imposition of tariffs by the Trump Administration could lead to job cuts in excess of 179,000 jobs. That loss is before any tariffs are imposed on U.S. goods, which inevitably will be the case.

This matters because the U.S. has to fund a large deficit and at a time of increased issuance, possible rising inflation, a ballooning budget deficit and reluctant investors. Real income gains remain weak and the savings rate is now at 2.7%. Household debt has now ballooned to $13.1 tr in October – December period.

With all this in play the yield curve may not invert but that does not mean the U.S. cannot slip into recession. By way of history, of the recessions that occurred in the fifties and before the fifties, only about 50% were preceded by an inverted yield curve.

The important news of the day though had to do with Draghi. The ECB appears to be relatively confident about European growth. That probably explains why the ECB has been buying fewer bonds and why the pledge to accelerate its bond buying programme should the economy deteriorate been removed from its release.

As the bond buying programme by the ECB slows, this too will impact on U.S. treasuries, forcing rates higher again. It will be interesting to see how the carry trade works.  For the moment, the carry trade is being wound back because every time the U.S. hikes rates, the interest cost rises. Given the USD has been relatively weak as well has not helped the arbitrageurs. Bunds rose on the day and U.S. treasuries saw yield rise  due to fears about increased supply.

The implication for markets, however, is that the stimulus provided by the ECB may well end before the end of 2018. That implication will take time to digest and that also spells a tightening of sorts for the U.S. Treasury Market as European investors may choose to buy their owns bonds in preference to treasuries.

The Great Unwind is Looming! Interest rates in Europe are expected to be hiked in the second quarter of 2019.

As for the implications of tariffs by Trump which will be imposed in 15 days,  “the European Union has said it would retaliate immediately against any U.S. tariffs which are based on the 1962 U.S. law allowing such measures for National Security.”  The very same reason Trump gave for his imposition of tariffs.


Equities: The S&P 500 rose 0.45 %. The Dow rose 0.38% and the Stoxx 600 rose 1.1%. The Vix closed at 16.6.

Currencies: The Bloomberg Dollar Spot Index rose 0.5%. The euro fell 0.8%.

Bonds: The ten-year closed around at 2.86%. The 2-year closed at 2.25% and the 30-year closed at 3.13%. The ten-year bund closed at 0.63 and the UK gilt closed at 1.478% and the OAT closed at 0.867%. The U.S. curve closed 2/10 at 60.5 bp, 2/30 at 87.3 bp and the 10/30, closed at 26.6 bp. The U.S. 5-year closed at 2.63.

Commodities: The WTI fell 1 %. Gold fell 0.4%

Bitcoin is trading around $9,408.81.

Aussie Market Today.

The equity market should be choppy as a result of Trump imposing tariffs in 15 days’ time. With little detail at present,  it’s hard to know how hard the markets will be hit. This sell off could take a few days to reach maturity. However, the initial response on the U.S. market, post the release of tariffs, was to rally.

Bonds are likely to follow the U.S. trend and drift. One should expect some selling on the day.