In January Donald Trump delivered the tax reforms that put the euphoria into equity markets, on Thursday he put the fear back in as he raised the spectre once again of trade tariffs on steel and aluminium imports. The tariffs themselves may have a negligible effect on China as steel to the US forms a small portion of their overall exports. It’s the possible consequences of his actions that is a concern, and will this lead to a trade war that will impact economic growth? This tweet came at a time when capital markets were already fragile after Jerome Powell’s testimony. His comments were probably more hawkish than investors might have been anticipating. Tariffs can have the impact of driving inflation higher, reducing growth and this could in turn put further rate rises on the Fed’s agenda.
Equity markets are likely to continue to remain under pressure for the time being. The Fed may well raise rates 4 times this year and not three, economic growth in the first quarter looks like it might be a tad softer than expected. Thursday’s tweet could have further implications for all the above. The bullish sentiment probably needs to unwind further before equity markets will find a base. The S&P 500 probably needs to retest the 2550 level it did earlier in February.
The US equity market has been trading higher on multiples that were above historical averages, as has been well documented. This can be sustained when the picture looks rosy when the clouds appear the correction can then become deeper.
Having recently attended the Moody’s credit conference in London, the notes of the event were published last week. The headline title “market outlook for the year ahead 2018 is mostly smooth sailing”. That headline alone should make anyone wary that choppy waters are likely to be seen. What was high on the concern list amongst money managers, interest rates and the possibility of a policy mistake from one of the central banks. Looking back at the December Merrill Lynch Fund Manager survey, nowhere does trade wars even enter the list of potential threats to capital markets, despite Donald Trump's commitment when he gained office.
There is plenty of other events in the week ahead to focus investor minds. Italian elections, Brexit and the latest US jobs report. This along with the US ISM services PMI, and factory orders. China will also be back in focus after the weaker than expected recent PMI data as we get the latest trade balance and consumer inflation. We also get policy decisions from several central banks around the globe, including the bank of Japan and the ECB.