By Michael O’Neill
“Prediction is very difficult, especially if it’s about the future.” Danish physicist Nils Bohr proclaimed back in the day. Central bankers know it to be as true now as it was then and Mr. Bohr never heard of Donald Trump.
President Trump twitter bombs have roiled global equity markets and increased foreign exchange volatility. They have also caused headaches for Central bankers as evidence by Bank of Canada statements and the minutes of the Federal Open Market Committee meeting of March 20-21. FOMC members said they weren’t too bothered about the imposition of steel and aluminum tariffs” but a strong majority of participants viewed the prospect of retaliatory trade actions by other countries, as well as other issues and uncertainties associated with trade policies, as downside risks for the U.S. economy.”
If they were concerned about trade wars putting downside risks to their economic outlook, the President’s actions after their meeting should make them terrified. He ordered new tariffs on $50 billion worth of China imports and threatened to add tariffs on another $100 billion worth of goods.
China responded in kind and levied their own taxes on $50 billion of US imports.
The Bank of Canada was concerned about trade and said so in their March 7 statement, saying “trade policy developments are an important and growing source of uncertainty for the global and Canadian outlooks.”
It has gotten worse. Syria reportedly launched a chemical weapon attack on a rebel base. President Trump condemned the action and promised a decision on a response saying President Putin, Russia and Iran are responsible for backing Animal Assad. Big price to pay.”
FOMC members were already worried about an escalating trade spat posing downside risks to their forecasts, so adding a shooting war into the mix would really make a mess of the outlook. Toss in an oil price shock and things could get ugly.
The steep plunge in oil prices that began in November 2014 when Saudi Arabia decided to turn on the taps and target market share rather than price played havoc with global economies. A steep rise in prices would have the same impact. Oil prices have risen 9% since April 6. US and Syria/Russia tensions boosted prices while an attempted missile strike by Houthi rebels on Saudi oil storage facilities accelerated the gains.
The Houthi rebels are fighting a civil war with the Yemen government because they do not support President Hadi. Saudi Arabia suspects that the Houthi’s are backed by their arch-nemesis, Iran. Houthi controlled territory is on the Saudi border, and the Kingdom has been actively bombing rebel positions. It is easy to see how attacks on Saudi oil storage fields can escalate the hostilities. If that happens, oil prices will soar, and WTI could touch $85.80/barrel.
However, all of the above are only economic risks, not reality. Oil prices can rise, but they can retreat just as quickly. There is no shortage of oil in the US or Canada. The US is the world’s top producing country, and Canada ranks fifth. The International Energy Agency forecast global oil supply would outpace demand in 2018, which should limit top-side oil price movements.
President Trump has been tweeting conciliatory messages to China, characterizing the tit-for-tat tariffs as a negotiation declaring that China President Xi Jinping and he would always be friends.
He used a similar tact with Russia. He blamed the Russia/China “bad blood” on Democrats and Fake News while offering to help Russia with their economy.
The North America Free Trade Agreement negotiations took a turn for the better in recent weeks. Although the planned announcement of an “outline to an agreement” didn’t occur as planned this week, a deal could be done as early as next month.
A similar turnaround happened between the UK and the European Union. Fears of a “hard” Brexit dissipated after the negotiating committees agreed to a 20-month transition period. Sterling rose over 3.5% on the news, although the prospect of a Bank of England rate hike also contributed to the gains.
President Donald Trump is the common denominator for a host of financial market tensions and uncertainties. So far, he has been all baloney, no sandwich. Traders have yet to turn a deaf ear to his tweets and verbiage, but the shelf-life of his words gets shorter by the day. It is hard to say if the trend will continue because as Mr Bohr said: “Prediction is very difficult, especially if it’s about the future.”