There are certainly a lot of issues that could potentially have a dramatic impact on global financial markets. The notion of higher interest rates, recession, accelerating inflation and geopolitics are all likely to weigh on risk assets in the months and quarters ahead. Now, the threat of a global trade war can also be added to the list.
President Donald Trump recently announced a 25% tariff on steel and a 10% tariff on aluminum. The President is set to sign off on the proposal this week or next, and as of right now no country is excluded. This could be the first step in what could turn into a larger trade war.
Some nations have suggested that they would retaliate, and the issue of trade is certainly something that could have a significant impact on equity markets. Companies in numerous arenas, such as machinery, heavy equipment manufacturing and building products, could all see sharp declines in their stock prices due to the legislation.
President Trump has reportedly indicated to Mexico and Canada that the tariffs would only be rolled back in the event that concessions are made regarding a new NAFTA agreement. The U.S. appears ready to take a hard line on the issue, regardless of what the consequences may be.
The U.S. also seems ready and willing to slap new tariffs on European imports, if Europe decides to respond. As of Friday, several nations, including Canada, Europe, Mexico, China and Brazil were reportedly weighing possible countermeasures.
Not only could such action fuel a global trade war, but it could have significant effects on the stock market-even putting an end to the “Trump” rally. It could also play a role in an economic contraction, and could force the Fed to think twice about the path of interest rates. A trade war could also impact the dollar, potentially sending it lower and contributing to a decrease in purchasing power.
Gold could potentially see significant buying interest if the trade war escalates. Increasing risk aversion, a weaker dollar and lower stocks could all drive capital inflows into perceived safe haven assets such as gold.
The potential for a trade war comes at a time when stocks may already be arguably overvalued, as the aging bull market tries to stay intact. The dollar has already seen significant downside in recent months, and could be very close to another, major leg lower. Dollar outflows could exacerbate the situation rapidly, as investors may see no advantage to holding dollars if the trade war gets under way. This, in turn, could also be very negative as the U.S. is in the midst of an exploding deficit. In other words, the U.S. would essentially be going to war on trade with nations that it is relying on to finance its debt.
A trade war would likely dominate headlines in the weeks and months ahead, and could lead to a massive exodus from risk assets and dollars. That being said, investors may look to buy any dips in the gold market, and prices may not see any significant downside pressure against the current economic and geopolitical backdrop.