March 9, 2018 / 8:48 AM / 11 days ago

Daily Briefing: Trump throws down trade challenge

LONDON (Reuters) - U.S. President Donald Trump set plans overnight for import tariffs of 25 percent on steel and 10 percent for aluminium but exempted Canada and Mexico and offered the possibility of excluding other allies.

U.S. President Donald Trump gives out pens he used to sign presidential proclamations placing tariffs on steel and aluminium imports to workers from the steel and aluminium industries at the White House, March 8, 2018

The European Union has said it was working on the assumption that it will be among those offered exemptions but is ready to retaliate immediately if not - largely symbolic measures on US goods ranging from jeans to Harley Davidsons have been teed up. European Commissioner Cecilia Malmstrom is due to speak at a Brussels event this morning.

As ECB President Mario Draghi noted yesterday, the direct impact on the global economy of the U.S. tariffs might be fairly limited but the concern is that such unilateral actions lead to tit-for-tat action elsewhere and start to undermine investor confidence in the trade system.

Thousands of Slovaks are expected to take to the streets in Bratislava and other cities this evening in protests against the government following the murder on an investigative journalist probing into corruption last month. PM Robert Fico is under pressure from both the street and the country's liberal president to step down and reshuffle his government but he is resisting so far; indeed he says the whole thing is a foreign conspiracy involving financier George Soros.

A poll of some 60-plus economists taken by Reuters has some interesting take-aways on Brexit expectations. All but one of the respondents expected a transition deal will be struck - countering therefore some of the nerves that have been hitting sterling in recent days. Nearly every respondent said the most likely eventual outcome from talks between London and Brussels would be a free trade agreement.

However, the second most likely option was no deal, forcing Britain to fall back on WTO rules to trade with the EU. The so-called “soft Brexit” option of remaining in the European Economic Area, which would mean staying in the EU’s single market, was the third most likely option - trailed by cancelling Brexit altogether.


World stocks are back in the black, albeit marginally, but they have risen to one-week highs and up almost 2 percent this week. The yen, towards which people run when risks are afoot, is down half a percent and likewise gold prices have fallen and are on track for a third week of losses.

Trade wars? While steel and aluminium shares are down globally, people remain hopeful that more exemptions to the import tariffs will be made, in addition to Mexico and Canada. Second, news of possible rapprochement between Trump and Kim Jong-un have sent Asian shares surging, with Seoul index at a 10-month high.

The Bank of Japan was suitably dovish – while sounding optimistic on growth Governor Kuroda reiterated there would be no plan to change monetary policy before the 2 percent inflation target is met. So the yen weakened and Japanese stocks close half a percent higher (not everyone is pleased about the Kim-Trump planned meeting by the way – defence shares in Asia are down).

Traders work on the floor of the New York Stock Exchange, March 8, 2018

But there is a possible bump in the road and already there are signs the Korea-linked euphoria is fading, with European markets set to open a touch lower. The reason is that February U.S. payrolls are due. This week’s private sector job readings from the ADP topped forecasts again, so there is the chance of a higher-than-expected official non-farm payrolls number.

Attention will focus in particular on earnings after a tick higher in wages in last month’s labour report helped trigger a violent equity correction by raising the possibility of more rapid Fed rate rises.

Meanwhile the excitement continues in Hong Kong, with the Hong Kong dollar hitting a new 33-year low for the sixth straight day and heading towards the 7.85 market which is the limit of the trading band at which the de facto central bank has pledged to step in. Chinese markets are calm, so far shrugging off trade concerns and a rise in consumer inflation to four-year highs.

However, remember much Chinese data early in the year is affected by the big Lunar New Year holiday and is taken with a bit of caution by market players. Factory-gate inflation meanwhile softened for the fourth straight month – this usually heralds a profits slowdown at the so-called “smokestack” industries such as miners and smelters and manufacturing.

On currency markets, the euro is at a four-day low against the dollar, having lost 0.8 percent on Thursday after the ECB’s dovish message on policy; the greenback has inched to a one-week high against a basket of G10 currencies; we have inflation data in a number of European countries. However, German industrial output fell in January, a sign that factories may be slowing.

On the sterling front, the pound fell yesterday and is not far off 1-1/2 month lows hit last week – industrial output data could provide some direction today. Southern European bond yields are down again, outperforming their German counterparts after Draghi’s dovish message yesterday.

On European share markets, indexes have opened slightly weaker after strong gains on Thursday after the ECB boosted bank share prices. As the earnings season fades, M&A has stolen the spotlight with three big deals: China Resources acquire Heineken’s China business in a deal that could be worth more than $1 billion, Royal Dutch Shell and U.S. private equity firm Blackstone Group working on a joint $10 billion bid for BHP Billiton's U.S. shale assets and Spain's ACS and Italy's Atlantia which may decide to break-up Spanish toll road company Abertis rather than press on with a costly takeover battle.

In other company news and movers, British satellite company Inmarsat said it would lower its dividend in 2018 and beyond to fund an investment drive in its aviation division, after core earnings fell in the fourth quarter. Inmarsat shares are down 3.5 percent.

Emerging equities are in for a solid finish to the week, with Korea and Hong Kong up more than 1 percent. The benchmark index is up 0.5 percent on the day and 1.6 percent on the week while Korean stocks have added 2.64 percent over the week.

Some still smarting from the dollar’s jump on Thursday, emerging currencies trade mixed to a touch weaker. South Africa’s rand, Turkey’s lira and Russia’s rouble all weaker and look on track for a second or more week of losses. Hovering unchanged on the day, the Hong Kong dollar, which has hit repeatedly the weakest level in 33 years this week, is on track for a 0.1 percent fall over the past seven days - its worst week since May 2017

— A look at the day ahead from European Economics and Politics Editor Mark John and EMEA markets deputy editor Sujata Rao. The views expressed are their own. —

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