Martes, 13 de Marzo de 2018 Redacción

Trade quarrels or trade war? • US domestic politics ensures that ongoing, US-masterminded trade quarrels remain a source of financial market volatility. • A trade war with across-the-board tariffs and substantial retaliation measures is very unlikely, although it would have a considerable impact on growth, inflation and the US dollar.

 

As planned US tariffs on steel and aluminium are fuelling fears of a global trade war, we expect US-masterminded trade quarrels to remain a source of volatility for financial markets. In contrast to a trade war, a trade dispute only involves selected products and countries and only symbolic retaliations. The reasons for continued trade disputes can be found largely in US domestic policy. Donald Trump’s low approval ratings, the upcoming mid-term elections and the popularity of protectionism with the American public are strong motives for the US administration to pursue its protectionist rhetoric and action. However, a trade war, which would involve across-the-board tariffs and retaliation measures well beyond symbolic actions, is very unlikely.

The negative impact of trade quarrels restricted to selected products and countries, including symbolic retaliation measures, should be confined to higher macroeconomic and financial market volatility. While inflation could turn out marginally higher, with the introduction of import duties, the direct impact on growth should be negligible. A trade war, in contrast, would have a more visible impact on lowering growth and increasing inflation. As this kind of stagflation scenario tends to be associated with a weaker US dollar, the currency could also suffer and fail to capitalise on its interest rate advantage and its superior economic data momentum. This would be especially true if the Federal Reserve were to change course and abandon is policy normalisation path or reverse it.

We attach a 75% probability to continued US-masterminded trade disputes and just 20% to an across-the-board trade war. There is also a remote 5% probability that the current trade quarrels will turn out to be just worries that will disappear in the coming months.

 

David Kohl, Chief Currency Economist Julius Baer

Bonds: Anxiously waiting for China’s appetite for Treasuries

 

• The slowing of US wage growth in February failed to dampen market-based inflation expectations.

• In view of the massively increased US Treasury financing needs, the market is anxiously waiting for indications of foreign (Chinese) official take-up at the forthcoming auctions.

 

The US government bond market is subject to opposing forces and bond yields will thus become more volatile going forward. The slowing of wage growth in February, published last Friday, was bond supportive. After 2.9% in the year to January, average hourly earnings only gained 2.6% in the year to February. That decline, however, was insufficient to bring down market-based long-term inflation expectations. The latter are indicated in the chart below, with the ten-year break-even inflation rate, i.e. the average inflation rate that equals the return of inflation-linked and conventional bonds. The ten-year break-even inflation rate has remained above the Federal Reserve’s (Fed) 2% inflation goal.

The US government bond market is negatively affected by the current trade debate. It is not the impact on inflation that is worrisome, but rather China’s reaction, the biggest holder of US Treasuries. China directly held USD 1.2 trillion of Treasuries at the end of last year, compared to Japan’s USD 1.02 trillion. Not only the holdings are crucial, but also China’s appetite to participate in forthcoming refinancing auctions of the US Treasury. The latter has to finance all the tax cuts and spending programmes of US President Trump. Treasury Secretary Mnuchin thus needs to finance up to USD 800 billion or even USD 950 billion – more than twice last year’s volume. Without prominent participation of China, such an amount will be hard to refinance without markedly higher rates.

 

Markus Allenspach, Head of Fixed Income Research Julius Baer

 

Platinum and palladium: Soft China sales add to car market fatigue

 

Palladium struggles to climb back above the much-watched USD 1000 per ounce mark. Headwinds come from the Chinese car market, which dominates global car sales and thus is pivotal for palladium use in catalysts. The Chinese Association of Automobile Manufacturers reported comparably soft February sales data. Taking into account the Chinese New Year holiday effect, sales are up less than 2% in January and February this year. Consumers likely pushed purchases forward in late 2017, eyeing a tax hike by year end. The global slow-down of car sales is a key topic to watch with not only China but also the United States showing signs of fatigue. Meanwhile plug-in cars had a stellar start into the year with sales rising strongly in China in the first two months. Again, with subsidies soon reduced for smaller plug-in cars, consumers may have pushed purchases forward. In Europe, sales picked up lately reflecting the solid economic backdrop, but diesel market share is rapidly declining. Last month’s German court decision paving the way for potential driving bans adds to the concerns about the technology, although new diesel cars would not face restrictions. The market mood still looks buoyant for palladium and seemingly overlooks the car market slowdown. With hedge funds and other investors crowded on the long side of the futures market, risks of profit-taking loom large.

Chinese car sales are off to a soft start this year adding to the global car market fatigue so far visible in the United States. Given our outlook for a slowdown in global car sales and today’s excessively bullish sentiment, we maintain a bearish view on palladium. Meanwhile the diesel headwinds seem largely reflected in platinum prices and we stick to our neutral view.

 

Norbert Ruecker, Head of Macro & Commodity Research Julius Baer

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