Stocks Bounce Despite Trade War Concerns

Markets Rebound as Republicans Oppose Trump Tariffs Plan

Investors may have been rattled by the prospect of a trade war after Donald Trump’s recent tariffs announcement, but equity markets are once again recovering as it becomes clear that the US President does not have the full backing of his party of this one.

Some Republicans, including House Speaker Paul Ryan, have warned against starting a trade war that could damage the economy and undo the benefits of the recently passed tax reforms, highlighting that Trump is lacking the full support of his party on this particular issue. Trump’s comments linking the tariffs to NAFTA negotiations also suggested that they could be dropped if a new agreement is signed, suggesting he may simply be using the threat of tariffs to put pressure on others to deliver what he considers to be fair and reciprocal trade.

That may enable Trump to extract some concessions from Mexico and Canada, or at least allow him to claim credit for securing a better deal, but it’s unlikely to work as well with the European Union and China, among others. The prospect of a trade war will be a big concern for markets, with many of the view that such action would drive up prices for all and weigh on economic growth.

Trumps Tariff Pushback Dents Trade War Fears

European Markets Unfazed By Italian Result, For Now

While markets are rebounding, US indices are still more than 5% off their highs having gone through an unusual rough patch over the last month or so, while some in Europe are faring even worse. The German DAX is almost 10% below its January highs, with the long drawn out negotiations not helping matters, although this did come to an end this weekend with the SPD voting to join a grand coalition again. The prospect of tighter monetary policy may also be weighing on European markets at a time when the euro area economy is gathering some momentum.

The Italian election weighed heavily on the FTSE MIB heading into the weekend and at the start of the week, although we have seen a strong rebound over the last 24 hours. The strong performance of populist euroskeptic movements in Italy and corresponding underperformance of the established parties will be a concern to those hoping for political stability and a pro-EU government. It will also cause a major headache for the rest of the EUs desire for an ever-closer union in the unlikely event that the two main populist parties go into coalition.

At the moment the impact on the wider market has been minimal, which may reflect the change in tone from euroskeptics from demanding a referendum on membership to simply criticizing the project and opposing a closer union. While this stance could revert once in power, especially in the case that the euroskeptic parties go into coalition, at the moment the risk of a referendum and vote to leave is still slim. The greater issue is prolonged political instability and weak growth.

I Won’t Back Down

Central Bank Speakers Stand Out in Quiet Session

While today is looking a little quieter in terms of major economic events, particularly when compared to the rest of the week, there are a few central bankers making appearances which will be of interest. These include Lael Brainard from the Federal Reserve, Andy Haldane from the Bank of England and Governor Philip Lowe from the Reserve Bank of Australia.

For a look at all of today’s economic events, check out our economic calendar.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Craig Erlam

Craig Erlam

Senior Currency Analyst at OANDA
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the Wall Street Journal and The Telegraph, and he also appears regularly as a guest commentator on networks including Sky News, Bloomberg, CNBC and BBC. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.