5 February 2018
Just as markets were bracing for a fight between Mr Trump and the swamp over the government shutdown, the can was kicked down the road and we have to wait for a few more weeks for hostilities to resume.
The prolonged shutdown debate might get entangled with the debt ceiling issue, adding some spice to the fight. But it is doubtful this will affect sentiment, given the current swell of optimism in equity markets.
Meanwhile, Mr Trump has found time to impose tariffs on solar panels and washing machines.
So far this has caused barely a ripple outside the affected sectors, but we warn nonetheless that if pursued fully, this belligerent approach is a bad idea. It does not have any obvious beneficiaries in the long run: trade wars seldom have winners. Consumers in the U.S. will have to pay more, and almost certainly this will trigger retaliation, followed by unintended consequences.
Mr Trump’s election rhetoric has raised fear of a trade war, but 2017 was characterised by an eerie silence on this front. If he now begins to “deliver” on his promises, he will risk introducing headwinds to growth and potentially undermining the near-term boost of tax cuts.
The particular loser in this conflict is still likely to be Asia. The region received a free pass in 2017 as no major trade friction flared up. For Asia’s growth surge to run its course the best scenario will again be for new tariffs to show little to no progress.
As the equity markets begin the year in highly confident mood, government bonds are doing less well. It stands to reason that as the solid growth prospects become more embedded, bond markets will gradually begin to price in more normal inflation outcomes. This is the case not just in the U.S., but also in Europe and other developed markets excluding Japan.
We have commented recently that the ECB may come to rue its firm commitment to gradual easing, given the strong performance of EU’s core economies. We therefore continue to expect long-term yields to drift higher throughout the course of the year in G10 ex-Japan.
Meanwhile, gold prices should remain stuck in the US$1,200-$1,330 range. Oil prices may have some upside this year, but we are still cautious over excess supply.
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