January 31, 2018 / 12:11 PM / 10 months ago

Commentary: Markets will slide, but maybe not on slippery slope of protectionism

LONDON (Reuters) - Protectionism and the growing threat of global trade wars are near the top of investors’ concerns for the year ahead, but from a financial market perspective, these fears may be overdone.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., January 26, 2018. REUTERS/Brendan McDermid

When it comes, the market correction is far more likely to be sparked by rising bond yields, a spike in inflation, a clear out of over-stretched positions or corporate earnings failing to meet optimistic expectations than by trade disputes.

It may already be happening. Look at how stocks reacted to the 10-year U.S. Treasury yield’s spike above 2.70 percent this week - they chalked up their biggest two-day fall since May last year.

That’s not to say specific sectors and companies won’t be hit by countries imposing tariffs, import restrictions, anti-dumping or other punitive measures on other countries’ goods and services. They will be.

“Pricing the potential impact of protectionism can be challenging, as discriminatory trade measures typically affect specific sectors rather than broad markets,” Lucas Martin, financial economist at the Institute of International finance wrote last week.

Still, the international mood music around trade has struck a discordant note since Donald Trump entered the White House on his “America First” ticket. The United States has since imposed more “harmful” trade interventions than any other country in the world, according to Global Trade Alert, which monitors state interventions.

U.S. Commerce Secretary Wilbur Ross and Treasury Secretary Steven Mnuchin made Washington’s position on international trade crystal clear in Davos last week - “America First” it is, and the rest of the world had better deal with it.

Last week, Washington slapped new tariffs on the imports of washing machines and solar panels, measures that will affect Asian exporters in particular.

Investors fear retaliatory measures, particularly from China, while multilateral trade agreements such as the Trans-Pacific Partnership and North American Free Trade Agreement are unraveling.

But according to analysts at JP Morgan, the United States has been in a state of perpetual trade conflict with various countries for decades, and the broader market impact has been negligible.

Since 1980, U.S. companies have filed an average 50 petitions a year with the Commerce Department for two types of relief: anti-dumping measures (to compensate for foreign companies selling below cost) and countervailing duties (to neutralize foreign subsidies).

 (For a graphic showing U.S. trade petitions since 1980, click here: reut.rs/2DKcDYJ)

The dollar value of these cases investigated each year amounts to barely 0.4 percent of all U.S. imports, a “trivial” amount, according to JP Morgan. An even lower share is eventually subject to tariffs.

“The Trump administration could double or triple the average number of trade enforcement claims without harming risky markets more than intra-week,” JP Morgan reckons.

These complaints ebb and flow with the economic tide - more in times of recession and fewer in periods of expansion. In that light, with the global economy experiencing its strongest boom in years and world trade expanding at an even faster rate, maybe 2018 won’t be quite as confrontational after all.

 (For a graphic showing Global trade growth, click here: reut.rs/2DMW0eV)

Even if it is, much of the anticipated market fallout may already have been discounted into current asset prices.

As the IIF points out, stock markets in many countries which run large trade surpluses with the United States have underperformed since Trump’s election in November 2016. Stocks in Mexico and Canada, countries threatened by a U.S. withdrawal from NAFTA, are notable examples.

U.S. multinationals have underperformed their euro zone counterparts for much of the past year too, and only started to close the gap since it became apparent late last year that Trump’s tax reform package would get through Congress.

 (For a graphic showing Overseas stocks and US trade imbalances, click here: reut.rs/2DLKxMx)

 (For a graphic showing Euro zone vs US multinationals, click here: reut.rs/2En1i1K)

Meanwhile, after registering one of their best starts to a year ever and posting record high after record high, world stocks are finally wobbling. And it’s nothing to do with trade frictions.

Billionaire investor Jeffrey Gundlach of DoubleLine Capital said on Jan. 10 that the S&P 500 might rise another 15 percent but would close the year down. And the trigger would be bonds.

“If the 10-year goes above 2.63 (percent) ... it will accelerate higher and equity markets are going to be spooked, and maybe that’s the cocktail that is coming our way,” he said.

This week the 10-year yield hit 2.73 percent, the highest in almost four years, and it looks like some of the stock market froth is starting to come off.

 (The opinions expressed here are those of the author, a columnist for Reuters.)

Reporting by Jamie McGeever Editing by Jeremy Gaunt

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