John Chatfeild-Roberts: Trade tariffs start to bite

Marmite and President Trump both sharply divide opinion, but you can ignore Marmite if you’d rather not put the glutinous, salty, black yeast extract on your teatime toast. As an investor you simply cannot ignore Donald Trump.

Without wanting to give a running commentary of recent events, Trump’s actions continue to have an impact. The combination of a relatively buoyant US economy and his tax reforms, the most far-reaching in a generation, are seeing US companies report record earnings for the second quarter of 2018, frequently beating analysts’ estimates. The broad-based S&P 500 index has recovered most of the losses seen since the end of January.

More widely, the imposition of trade tariffs and the international response to them, particularly from China, is having a pronounced effect as investors adjust to the possibility that such impediments to global trade show signs of being more enduring than short-lived. Commodity markets have reacted and copper and iron ore prices are both down sharply.

Economy undeterred by Brexit clouds

With a 2017 trade surplus of over $275bn (£215bn) with the US, China’s exports to America are directly jeopardised by tariffs. As they bite, in addition to imposing its own retaliatory tit-for-tat sanctions on goods imported from the US, China has allowed its currency, the yuan, to devalue by over 6 per cent since April (and by even more against the US dollar, which has appreciated in the same period against a basket of currencies).

Devaluation effectively reduces the price of China’s goods exported to the US to help neutralise the effect of the new levies and maintain competitiveness.

Economic experts such as TS Lombard predict the real tariff battleground may be in the foreign exchange markets rather than simply on the dockside, the potential consequences of which become more far-reaching. They ask, for example, were international investors to lose confidence in the yuan and withdraw capital from the Chinese economy, how would the Chinese authorities react beyond what they have already done?

Were the US dollar to continue appreciating against other currencies, would that cause the US Federal Reserve to reconsider the timing of future rises in domestic interest rates? Trump has targeted Germany too – which also has a substantial trade surplus with the US – but unlike China, Germany has no country-specific exchange rate safety valve; any reaction through the euro in different ways affects the other 18 members of the eurozone too, not just Germany.

What does Italy’s election mean for the rest of the eurozone?

What started three months ago as a seemingly simple imposition of tariffs on steel and aluminium goods imported in to the US has quite quickly evolved in to something broader and more complex, the longer-term consequences of which (intentional or not) may only emerge as the various players pursue their dispositions in this gigantic game of geopolitical and economic chess.

An outbreak of bravery at the Bank

Closer to home, Brexit negotiations continue to lumber towards an uncertain conclusion. One bright spot for the UK is that the Bank of England has arisen from its decade-long slumber and finally increased the base rate by a quarter point to 0.75 per cent, the first “proper” interest rate rise since 2007 (ignore the one from 0.25 per cent to 0.5 per cent last November, as in our view reducing rates in the aftermath of the Brexit referendum was an absurdly pointless gesture). The increase was rated a racing certainty by the money markets, so came as no surprise.

More noteworthy was the previous meeting of the Bank’s Monetary Policy Committee in June at which, on the face of it, nothing happened. But look again! The MPC comprises nine members (including the governor), four of whom are independent external members appointed by the Chancellor; the rest are employees of the Bank.

The base rate increase was rated a racing certainty by the money markets

June was the 53rd interest rate setting meeting since governor Mark Carney’s arrival, coinciding with the Bank’s mandate being altered to consider economic growth alongside targeting inflation of 2 per cent.

While some independent members of the Committee had occasionally urged an increase in interest rates since mid-2013, they had always been outvoted. The June meeting was the very first in all that time that a Bank employee (in this case, the Bank’s chief economist Andy Haldane) voted against the governor. How refreshing. Otherwise one might be forgiven for asking what the point of is having such people on the Committee if they are simply supine with the boss in the chair.

John Chatfeild-Roberts is head of strategy for the Jupiter Independent Funds Team

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