Global trade wars and UK growth concerns

Chief Strategist, Guy Foster, and Head of Market Analysis, Janet Mui, discuss how the U.S. market has rallied amid continued global trade tensions, while the UK economy faces contraction.

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Market highs amid trade turmoil

The U.S. stock market has risen by over 25% since 8 April, reaching a new all-time high. The rally began when President Trump announced a deferral of the tariffs he had introduced on 2 April. However, the significance of this move seems to have been lost on President Trump, who remarked that he thinks the tariffs have been well received and noted the stock market’s record high.

These comments came in an interview with NBC, during which he floated the idea of imposing 15% or 20% blanket tariffs on “all the remaining countries.” It’s unclear which countries he was referring to. Some media outlets have speculated that he means replacing the baseline 10% rate with a higher rate of 15% to 20%. However, it seems more likely that he means those countries who had deferred tariff rates but haven’t received a letter. The latter explanation seems more plausible, as the Trump administration seems to have reached far fewer trade agreements than it had expected during the 90-day deferral period. Instead, most countries are expected to receive letters, some of which were sent out early last week.

However, by the start of this week, the majority of countries have neither received a letter nor reached a deal, and the 90-day deferral period has now expired.

Last week, additional punitive tariffs were announced on Canada and Mexico, with goods not already covered by the United States-Mexico-Canada Agreement (USMCA) now subject to 35% or 30% tariffs respectively.

Brazil attracted the president’s ire for pursuing a conviction against former President Bolsonaro. President Trump described the charges as a “witch hunt” and responded by imposing a 50% tariff on Brazil. Additionally, several other countries have received individual tariff letters. In most cases, these tariffs are close to the previous individual rates, although those rates were only in effect for a matter of hours before being deferred for 90 days.

The European Union continues to try and find a deal, but if it’s unsuccessful, President Trump announced that it would face a 30% tariff, an unusual 10%-point increase on the ‘Liberation Day’ rate.

The president has also begun announcing the results of sector-specific tariffs, including a 50% tariff on copper imports. The U.S. currently imports roughly half the copper it needs, as domestic production has been declining. While the tariff could help to reverse that trend, it can take between five and ten years to bring a copper mine from conception to production. In the meantime, the copper import tax is expected to increase costs for U.S. industries such as construction, electronics, automobiles, renewable energy and data centres. The impact of this policy was immediately seen in the diverging price of copper in London and Chicago trading venues. Previously, the two prices were virtually identical, but since President Trump began discussing the possibility of a copper tariff, the two prices have diverged by 25%. While the gap should arguably be 50%, transportation costs for moving copper between markets account for part of the difference.

Copper prices have diverged between London and COMEX

Source: Bloomberg

Whether industry lobbying will be enough for the president to walk back these tariffs, as he has done several times this year, remains to be seen. This is certainly the expectation of the pharmaceutical industry, which has been threatened with a 200% tariff. The tariff is set to be introduced after a grace period of about a year to allow companies to shift their manufacturing to the U.S. However, there’s no way this will result in a meaningful increase in domestic drug manufacturing before it effectively triples drugs prices − an especially contentious issue at a time when the cost of medication is a major concern for voters.

The president, buoyed by calmer markets, appears emboldened to return to the policies which triggered market sell-offs in the first place. He may also have been influenced by criticism of the policies from other billionaires such as JPMorgan Chase CEO Jamie Dimon, who recently expressed concerns about market complacency regarding tariffs during an appearance on Fox News. Obviously, those investors who panicked last time will be wary of doing so again. The risks of getting whipsawed when the market is being driven by the president’s erratic decision making add yet another factor to an already complicated situation.

However, President Trump himself has pushed back against claims of erratic policymaking. Last week, he remarked “We don’t change very much and every time we put out a statement, they say he ‘made a change’… I didn’t make a change, [a] clarification maybe.”

UK starts to feel tax pressures

Source: LSEG

UK gross domestic product (GDP) data released this morning revealed that the economy contracted again in May, defying forecaster expectations of a rebound following April’s decline. UK GDP has been buffeted by a few forces. Tax increases in April, including a rise in National Insurance, contributed to the contraction, and will likely have a lasting impact. An effective increase in stamp duty pulled some housing transactions forward into the first quarter, while exports to the U.S. were also brought forward to get ahead of tariffs.

The UK economy has been slow to recover its momentum. June should be better, though, with positive momentum rebuilding in trade after the earlier shocks this year. Nonetheless, weak growth makes an August interest rate cut increasingly likely. Lower interest rates would be very welcome, as they play a large role in determining whether the public finances stay within the chancellor’s fiscal rules, or whether tax increases are needed this autumn.

Coming up

• Earnings season: The third quarter has begun, and third quarter earnings releases will start landing this week.
• U.S. inflation: Inflation readings from the U.S. have not yet shown much inflationary impact, emboldening the president’s tariff agenda. But is that going to change?
• China GDP: After emerging from deflation last month, will there be an uptick in Chinese growth?

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