Has a Trade War Ignited?

April Market Overview

Last month we saw Donald Trump announce the introduction of tariffs on aluminium and steel with repercussions felt across the developed world and retaliatory procedures being touted by affected nations. As a result, markets saw a bout of volatility which was further exacerbated by a broad sell off in technology companies. The global economy continues to look strong, especially within the US, where US Gross Domestic Product was revised upwards and the Federal Reserve followed their predicted rate hike path.


Earlier this month, Donald Trump initially announced tariffs on steel and aluminium imports. The President followed this by suggesting that there could be a 25% tariff on $60 billion worth of Chinese imports. In retaliation, China announced that they could increase tariffs on $3 billion worth of US imports. It is important to contextualise the impact on the proposed tariffs for China and the US. They amount to approximately 0.1% of Chinese GDP and the tariffs proposed against the US are even less. This trade war ploy seems to be political rhetoric to push the protectionist stance which Donald Trump wishes to portray. Although, further trade risks cannot be ruled out, it is important to realise the minuscule nature of the current tariffs proposed.

The US economy grew at a 2.9% in the last quarter of 2017 and it is about to receive additional stimulus from tax cuts and higher federal spending approved by Congress. Jay Powell, the new Federal Reserve Chair, is now presented with a dilemma as he attempts to prevent an economy with unemployment at its lowest rate since the early 2000s from overheating even as inflation hovers below the Fed’s target. The Federal Reserve hiked

interest rates at their meeting last month, continuing with their timeline of interest rate increases. The central bank’s previous forecast, in December last year, predicted three interest rate rises in 2018 alongside continued reductions in the size of the central bank’s multitrillion-dollar balance sheet. However, many economic analysts now believe that Federal Reserve is increasingly likely to lift rates four times this year as unemployment continues to drop and inflation edges back to 2%.

With the positive economic growth rates evident across major economies this is allowing central banks in the United States, Europe and elsewhere to begin tightening some of the monetary policy endorsed immediately after the global financial crisis. The growing economies have led to fuller labour markets which could push up salaries. Rising wages could result in higher inflation and, in turn, a faster pace of short-term interest rate increases by central banks. This retreat of monetary policy by central banks led some investors to begin profit taking as they believed companies could not sustain their growth without the cheap and easy money they could obtain from central banks. However, the positives of a more stringent monetary policy from central banks is that it demonstrates that economies are growing and this is positive for the earnings growth of corporations.

Brexit & the UK

At the latest summit in Brussels, the other 27 European Union (EU) countries signed off a 21-month transition period and adopted the guidelines on the bloc’s approach to a future relationship with the UK, covering trade, security and other issues. European leaders decisively endorsed the start of negotiations on future connections with the UK and a transition that would prolong the UK’s transitional membership of the EU until the end of 2020. Theresa May welcomed a “new dynamic” in the negotiations, while Michel Barnier, Brussels’ chief Brexit negotiator, suggested that the European Union was “crossing a decisive point in this difficult and extraordinary negotiation”.

The Prime Minister suggests that the government can agree a deal that provides for trade that is “as frictionless as possible”. However, EU negotiators and some government ministers believe this can only be guaranteed if Britain remains part of the customs union. There are also indications that the House of Commons could vote to keep Britain in a customs union especially with Jeremy Corbyn’s announcement that the Labour party now supports membership of the customs union. If some of the more Europhilic Conservative Members of Parliament choose to support Labour’s stance then this could disrupt Theresa May’s vision for Brexit.

Onto economic factors, and the likelihood of an interest rate hike by the Bank of England is looking more and more probable. All nine members of the bank’s Monetary Policy Committee (MPC) approved a statement that the central bank would not tolerate inflation to continue above 2% over the next three years. Mark Carney, the governor of the Bank of England suggested that “it will probably be necessary to raise interest rates . . . somewhat earlier and to a somewhat greater extent than we had thought in November.” This rhetoric was comparable to that of September’s central bank meeting, which preceded the UK’s first interest rate rise in a decade in November, to the current level of 0.5%. The MPC next meet in May where it is likely that another interest rate hike is likely to be approved.


The European Central Bank (ECB) decided to keep interest rates at record lows and restated their commitment to keep monetary stimulus in place and potentially expand quantitative easing if it is necessary whilst inflation continues to stay below target. The ECB’s governing council repeated that it expects interest rates to remain at present levels until the end of its quantitative easing programme and they will continue with the purchase of €30bn of bonds each month. Policymakers have stated that this could be potentially increased until indicators see more signs that the inflation target will reach 2%. The central bank have scheduled the end of the quantitative easing programme for the end of September 2018. However, policymakers have indicated this could be extended depending on economic indicators/forecasts closer to the time.

The central bank have been comforted by Eurozone growth reaching its highest level in a decade. The Eurozone surpassed the US and UK, growing by 0.6% in the third and fourth quarter of last year. The annual growth rate for 2017 was 2.5%, the highest level reached in ten years and up from 1.8% in 2016. The US expanded by 2.3% and UK by 1.8% last year. The political stability of Europe last year helped to provide confidence to companies and investors. The win for Emmanuel Macron in France’s presidential and parliamentary elections was a typical example of this. French gross domestic product rose 1.9% in 2017, the fastest since 2011. Capital spending is widely seen as indicator of investment confidence and this rose to 3.7% up 1% from the figures produced in 2016. These positive figures has given optimism to global growth and economic sentiment across Europe.


North Korea’s Kim Jong Un is willing to hold summits with leaders of the US and South Korea and has even suggested deserting his nation’s controversial nuclear weapons programme. Kim Jong Un’s comments are the first conciliatory expression towards the nations where the state has previously taken a more aggressive stance. World stability is important for markets and any pacifying outcome of these talks could provide a more positive backdrop for growth.


Interest rate rises and the tightening of monetary policy suggests that the global economy is healthier. Donald Trump has now managed to push through his tax reforms and this is likely to be beneficial for US corporations. It will be interesting to see the outcome of the ongoing trade tariff discussions between the US and the rest of the world.

The Italian election has, as expected, produced an unclear result and therefore a coalition government is likely to be achieved.

The ongoing Brexit negotiations will continually be at the forefront of investor’s minds until a trade deal has been granted.

Please note: The opinions expressed in this update are those of A&J Wealth Management Limited only, as at the date stated above, and are subject to change. The update is for information purposes only. Source: Financial Times

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